By Nomi Prins, Editor, Inside Wall Street with Nomi Prins
At the May FOMC meeting yesterday, Fed chair Jerome Powell admitted we’re nearing a pause in rate hikes.
As a reminder, that’s Stage 2 of the Fed’s three-stage pivot.
He said this after raising interest rates by another 0.25%.
Based on his statements, I don’t expect another rate hike in June.
You see, the Fed has been talking tough about interest rate hikes for a while. But this was the first time Powell hinted at a pause in hikes.
As Powell put it, the Fed is watching economic data to determine what happens next.
He said the Fed remains committed to bringing inflation down. But he also said that inflation has softened.
Now, this might all sound vague. But the U.S. government is infamous for uncertainty.
And if there was an Olympic gold medal for wasting time, the U.S. government would win.
Ongoing arguments over the debt ceiling are a case in point.
We’ve talked about the debt ceiling here before.
And I told you it will ultimately be lifted. That’s still true, even though it’s a journey that’s slower than watching paint dry.
If you read between the lines, however, you’ll see that there’s a silver lining in it for you and your money.
So today, I’ll explain the most recent developments in the debt ceiling debate. It includes a piece of law that House Republicans just proposed.
More importantly, it reveals a certain truth about the energy sector… and how you can position yourself to profit from what’s coming.
But first, a quick refresher…
What’s the Debt Limit Again?
The U.S. debt limit, or cap, is the total amount of money that the U.S. government is authorized (by Congress) to make good on its legal obligations.
Those obligations include paying the interest on its national debt. They also include making good on things like Social Security and Medicare benefits, and military payments.
If the debt cap doesn’t get raised or removed, there’s a chance the U.S. government wouldn’t be able to make payments fully or that it’d default on existing debt obligations. Or both.
But a debt default is unlikely. Since 1959, Congress has voted to raise, temporarily extend, or revise the debt limit 89 times.
And these decisions were bipartisan: divided equally between both Republican and Democratic presidents. You can see this in the image below.
Source: Peter G. Peterson Foundation
Debt Cap Deja Vu?
If you feel like you keep hearing this story again and again, you’re not wrong.
That’s because on January 19, the U.S. hit its debt limit of $31.4 trillion.
Since then, the Treasury Department has used “extraordinary measures” to keep money flowing to where it needs to go in a D.C.-style shell game.
The U.S. Treasury has not been transparent about what actions it will take. But as far as we know, the Treasury could do the following:
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Stop issuing new securities for the Civil Service Retirement and Disability Fund (CSRDF) and Postal Service Retiree Health Benefits Fund (PSRHBF). That would save about $4 billion each month.
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Stop paying out monthly Social Security checks. This would save about $100 billion per month. It would also cause economic hardship for millions of Americans.
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Stop paying monthly Medicare Advantage healthcare plans and Medicare Part D prescription drug plans. This would save about $40 billion a month. It would also be financially damaging to millions of Americans.
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Stop paying active-duty military and military retirees, veterans, and Supplementary Security Income recipients. This would save $25 billion per month.
The reality here is that all of these options are embarrassing and would cause economic insecurity for millions of Americans on both sides of the aisle.
So there’s no obvious win here as it relates to the debt ceiling wars.
The White House can blame Republicans for the economic landmine a debt default causes, as a debt default would make U.S Treasuries worth less. Investors buying these bonds will be less certain about the U.S. government’s ability to make good on its interest rate payments. So they’d demand a higher premium, or interest rate, to cover the risk of that possibility in the future.
This would cause rates to rise to accommodate that higher premium. It would also cause Treasury bond prices to fall in tandem. (Note: This is basic bond math. When bond rates rise, their prices go down.)
And Republicans can blame Democrats for stopping the debt ceiling process but not agreeing to the proposed spending cuts.
The truth is, none of that really matters.
Because as long as politicians keep squabbling about raising or suspending the debt cap, voters will continue to suffer from more economic uncertainty and financial anxiety. And neither party really wants that.
The Latest Wrinkle
Since we last wrote about this, the House Republicans passed a bill that would raise the debt ceiling. In return, they want a cut in federal spending and to crush parts of Biden’s domestic policy.
On April 27, House Speaker Kevin McCarthy managed to get the 218 votes he needed to pass his debt ceiling bill. It wasn’t a huge victory, but it was a victory, nonetheless.
The problem is that the White House has made it clear that it won’t accept any bill that is linked to spending cuts. President Biden wants what’s called a “clean debt ceiling.” That means a debt limit extension with no spending cuts attached.
In response to this stance, McCarthy said, “No clean debt ceiling is going to pass the House.”
And yet, no party really wants to cause a default on U.S. Treasury interest payments or Social Security checks. Because of this, the White House has agreed to meet with McCarthy for the first time since February. Yet, it still won’t budge on the idea of a clean debt ceiling agreement.
So the fight continues. But there’s a positive in all of this for you…
Play the Debt Ceiling Fight in Energy
The McCarthy bill has made a variety of spending cut demands.
It seeks to return funding for federal agencies to its 2022 level and to limit future growth in federal spending to 1% per year. The Pentagon would be excluded from both these measures.
Those cuts would impact national services for 1 million senior citizens and 1.2 million women and children, as well as affordable housing for 1.1 million families.
They would also block student loan assistance, rescind $80 billion in new IRS funding, and add work requirements for certain safety net programs.
It’s unlikely the Dems would capitulate on any of these cuts, but there may be room for debate.
Now, the bill also seeks to repeal the green energy tax credits that were in the Inflation Reduction Act.
But this request will never get off the ground. And that’s good news for you and your money.
First, the green energy tax credits were at the core of the Inflation Reduction Act. They were also in the Republicans’ Lower Energy Costs Act, which was just passed by the House on March 30.
That means whether you want lower electricity bills or an electric vehicle (EV), both parties have already agreed to help you.
But it matters from an investing standpoint, too. Here’s why…
Clean energy subsidies have gone to states that are actively manufacturing clean energy sources and electric vehicles. These cover red states Georgia, Tennessee, and South Carolina.
The GOP wants to keep these states heading toward the 2024 election. And voters there would be more favorable to candidates if they felt their jobs were secure.
In short, as I told you earlier this year, both parties support spending on green energy.
The Dems support cleaner environment initiatives. The Republicans support lower energy bills, which come from better grids, more efficient energy sources, and energy independence.
So that brings me back to the key takeaway here.
No matter what happens in the fight about the debt ceiling, the trend for new energy initiatives has already taken off.
As my colleague John Pangere wrote to you yesterday, the U.S. needs an energy upgrade. That’s why I’ve been keeping my eyes on this sector for a long time.
No matter what happens in the fights between political parties, both recognize the country’s need for improved energy infrastructure.
That’s why my team and I have been heads down looking for the best way to play this trend. And on Wednesday, May 10 at 8 p.m. ET, I’m hosting a special briefing to uncover what we’ve learned. (RSVP with one click here.)
See, a new law titled S.1111 is poised to unleash $4 trillion into a new energy subsector called “SMR.” And it could happen as soon as May 12.
SMR could be the solution to America’s – and the world’s – energy problems. And only one firm has the federal license to produce this new energy technology in America.
On May 10, at my Power Shift 2023 event, I’ll dive into the details of this company – and how you can play it for less than $2 a share. If you get in before this story starts making headlines, it could hand you as much as 20x your money in the long run.
So don’t wait… RSVP with one click right here, and I’ll see you on May 10.
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins