Wall Street Breakfast: Debt Ceiling Showdown

Debt ceiling showdown

The U.S. today will reach its statutory debt limit of $31.4T, prompting a series of extraordinary measures to avoid a default on government debt. Looking to conserve capital at the federal level, the Treasury will start withholding investments from retirement funds for some government employees, while other measures will take weeks or months to kick in. “Failure to meet the government’s obligations would cause irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability,” Treasury Secretary Janet Yellen declared. “I respectfully urge Congress to act promptly to protect the full faith and credit of the United States.”

SA commentary: “The Treasury could just ignore Congress and issue notes and bonds with coupons well above current yields,” wrote SA contributor James Baker, referencing a novel solution to the debt crisis. “There is a big mess taking place behind the scenes,” noted Mark Grant, saying there might be drastic impacts on the financial condition of the Fed. “Reducing the deficit is not the same as reducing the debt,” added Ronald Surz, cautioning that “U.S. debt continues to climb into the stratosphere.”

While there will be discussions over the next few months, things are not likely to get serious until after the tax season deadline in mid-April, when the Treasury will know how much receipts and revenue have come in. That will reveal exactly how much time will be left on the clock until the government runs out of cash, though its obligations are likely to be funded until at least June. While raising the debt ceiling has turned into a bitter partisan issue over the years – even prompting a credit rating downgrade of U.S. government debt in 2011 – both parties have always reached a late deal to avoid the country going into default.

Game of chicken: Tensions are definitely on display this time around due to the razor-thin margins in Congress. Republicans are looking for big budget cuts, while Democrats and the Biden administration are threatening to play hardball with a clean vote and no conditions. Only a handful of rejections could derail any deal, and concessions may be a lot harder to come by, especially with extreme flanks enveloping both sides of the debt limit debate. (23 comments)

AI Age

With Microsoft (MSFT) investing billions of dollars into ChatGPT, and set to integrate the technology into its Azure cloud service, the world of artificial intelligence stands on the brink of a widespread breakthrough. That’s the opinion of Oppenheimer analyst Timothy Horan, who said that Microsoft pairing up with ChatGPT developer OpenAI has created an “iPhone Moment” for artificial intelligence, and that “things will now move fast” for AI at a speed that until now wasn’t possible. He calls ChatGPT’s breakthrough “epochal” and that, finally, “the AI Age has arrived.” SA Marketplace authors, Robert & Sam Kovacs, also flag four dividend stocks to profit from the ChatGPT AI revolution. (60 comments)

Losing momentum

Economists are seeing more red flags for the U.S. economy following the latest batch of reports on Wednesday. Retail sales dropped 1.1% in December, a sharper decline than was predicted (see the winners and losers here), while a separate report showed the third consecutive month of contraction in industrial activity. Looking to nail a soft landing, the Fed is likely to respond to the data by easing its foot off the accelerator, with markets fully pricing in a softer quarter-point interest rate hike at the end of the month. According to newly released stats from the National Retail Federation, retail sales during the holiday shopping season also lagged industry expectations. (16 comments)

Cloudy skies

The holiday meltdown at Southwest Airlines (NYSE:LUV) in December was not an anomaly, and many airlines will not be able to handle all the flights they plan to operate this year (let alone the anticipated growth). That was the message from United (NASDAQ:UAL) CEO Scott Kirby, who touted a dire view of the industry’s capacity following the company’s Q4 earnings results. Critical investments in tools, infrastructure and people are necessary amid a shortage of pilots and airline workers, outdated technology and strains on the FAA (remember the system outage a week ago?).

We want your feedback! Send a message to wsbfeedback@seekingalpha.com.