Video Update: You Don’t Have to Be a Victim of Political Drama

A possible debt ceiling crisis remains top of mind for many Americans today… with a resolution nowhere in sight.

Will the government approve expenses it’s already made or committed to? Will the U.S.’s credit rating get downgraded? What will that mean for the economy? And for stock market investors?

There’s a lot of what-if scenarios and potential fallout.

Luckily, Chief Analyst Adam Galas is here to go through the most up-to-date estimates and projections. He’ll break down what’s happening, what’s most likely to happen, and how Fortress Portfolio is built to protect you.

Click the image below to watch the video or scroll down to read the transcript.

Happy SWAN (sleep well at night) investing,

Brad ThomasEditor, Fortress Portfolio

Welcome Fortress Portfolio members to another weekly video update.

Today we’re talking about what Congress is doing to prevent debt default… A would-be disaster.

The debt ceiling is the only thing that matters right now.

Last week, we talked about the political potential as well as the economic and market impacts of a debt default. We also touched on Moody’s estimate that a one-week default could cause a 0.3% GDP recession and 270,000 job losses.

A two-month default, Moody’s thinks, would cause a 4% GDP recession just like the Great Recession, 7.5 million job losses and a 33% stock market crash.

Meanwhile, the Joint Economic Committee thinks a three-month default could cause a 6.1% GDP recession, 8 million job losses and a 45% stock market crash.

And in the last week, we received two new estimates from U.S. Bank (UBS) and Bloomberg Economics.

Now, UBS just put out a note saying they think a one-week default could cause a mild recession, 0.3%, just like Moody’s and a 20% stock market crash in a single week.

They think that if the default lasted a full month, then the economy falls by 2.1% and the stock market by 44%.

Meanwhile, Bloomberg thinks a three-month default could cause an 8% GDP recession and unemployment rising 5%, with 8.2 million job losses.

Now, as you can see for some context, the Great Recession was a 4% GDP contraction with 8 million job losses and a 57% stock market crash, the second worst in U.S. history.

The pandemic was a 9% GDP recession with 22 million job losses in just two months and a 34% market crash.

Of course, things would have been far worse for the economy in the pandemic, if not for the $9 trillion that the government threw at the problem, including fed money printing.

Now, unfortunately, time is running out.

There are four important things we must monitor.

The first is the risk.

The Treasury is estimating that by June 1 we will likely default on our debt.

Goldman Sachs (GS) has their own model running in real time daily on the Treasury account statements that says we have until May 29th.

But what about those other time countdowns, the deal expiration date?

That’s because once a deal is reached, it’s going to take time to turn that deal into actual legislation.

Then the House has to pass it. The Senate has to pass it.

And then finally, President Biden has to sign it. The final version would take at least three days to go through once a deal is reached.

And historically we have had other close calls. In 2011, we reached a deal three days before the expiration date, Congress basically worked 24/7 to prevent disaster at the time.

So how close are we to an actual deal?

Well, currently, both sides are $8 trillion apart, at least in terms of their budget proposals over the next ten years.

Now, the good news is, in terms of the debt ceiling negotiations, they’re only $5 trillion apart.

More specifically, the GOP proposal calls for rolling back 2023 spending to 2022 levels and then capping future spending growth by 1% for the next decade.

The issue the Democrats are having is that in 2022 we spent 8% less or 500 billion less. Now Democrats are proposing flat spending, which is -4%, adjusted for inflation.

So not as far apart as the budget proposals.

But the problem is there are a lot of other sticky disagreements as well. For example, the White House wants to increase spending on spending, but not the GOP.

The GOP wants to take that 8% spending cut and exclude the Pentagon, which would mean that non-defense social program spending would fall by 17%.

In addition to adding work requirements for things like Medicaid and food stamp, which has Democrats balking and up in arms.

There’s also disagreements between both parties on energy permitting reform, the elimination of green energy tax credits, cancellation of $400 billion in student debt, and even border security.

In fact, 54 GOP House members recently signed a letter saying they would consider not voting for any deal that doesn’t address border security.

Meanwhile, on the other side, 64 Democratic House members and 11 senators have signed a letter asking Biden to invoke the 14th Amendment, which we’ll talk about more next week, and force the Supreme Court to rule on whether the debt ceiling is even constitutional… Hoping to get rid of it forever.

At least that would be their plan.

In total, though, there’s 100 GOP House members estimated as well as 100 on the Democratic side who likely won’t vote for any deal.

In other words, even if we do get a deal and the House manages to quickly put together a bill, there’s no guarantee that it will actually pass.

And the reason for that is that both sides are being held hostage. On the Democratic side, we have progressives such as Bernie Sanders, Elizabeth Warren and AOC, who are far left and absolutely adamant that things like work requirements are not rolled back in addition to keeping our green energy provisions from the Inflation Reduction Act.

Now, the Democrats have 51 seats in the Senate. They can’t afford to lose more than two votes in order to pass anything in that chamber.

But the GOP can filibuster any bill other than judicial appointments unless there are 60 votes, which means that Democrats would require nine additional votes to pass anything.

Now, 43 GOP senators, including Minority Leader Mitch McConnell, have signed a letter saying they will not consider a clean rate increase of the debt ceiling.

They insist a bipartisan bill that addresses the deficit is the only thing they’re willing to let through.

Now, if you think the Senate drama is worthy of the West Wing, well, the drama in the House is worthy of Game of Thrones. In order to become Speaker, Kevin McCarthy (who was Trump’s choice for speaker) had to go through 15 rounds of ballots before receiving his position.

And to get become Speaker, he had to change the rules that allow a single person in the House to call for the removal of the Speaker.

So if the majority of the Republican caucus agrees at 112 votes, then McCarthy would be removed as Speaker. And instead of debating the debt ceiling, the Republican House would be scrambling to find a new leader.

Now, the problem is, if there is no speaker, no bills can be brought to the floor. So we couldn’t actually raise the debt ceiling. But there is a possible solution. It’s called the discharge petition, which allows a any bill with a majority of support to be brought to the floor, even if there is no speaker or simply if the speaker doesn’t want to vote for it.

But here’s the trouble. In order to use this, a bill has to be in committee for 30 days minimum before even signatures can even start to be collected.

But the Democrats saw a potential debt ceiling showdown coming. So back in January, they created what’s called a shell bill, which basically includes a bunch of policies that have nothing to do with anything that was put into 20 different committees and has been sitting there for months just in case.

And any kind of legislation can now be put in as an emergency measure. Now, so far, they’ve collected 210 votes. And if the final three Democratic votes get signed on and five GOP members sign on, then it could theoretically be brought to the floor and voted on in order to raise the debt ceiling.

Even if Senator McCarthy is removed from power.

But here is the problem.

That’s not going to work because after 218 votes are collected in a discharge petition, it then has to sit there for seven days before the second in command in the house.

Who would you be the House majority leader then? They would have to call a vote within two days. So in other words, it takes nine days and we don’t have that much time.

So that is essentially the problem.

And even if we did have the time, the Senate would still filibuster it unless it was bipartisan.

But this brings us to some good news.

The Problem Solvers Caucus in the House, which consists of 31 moderate Democrats and 30 moderate Republicans, have passed some of the most important legislation in America since 2017, including the CARES Act during the pandemic.

They have a bipartisan solution that you can see here. Basically, this is a proposal that gives both sides a win.

It addresses the deficit, just like the Republicans want, and it’s technically a clean debt ceiling increase, which the Democrats have been calling for the entire time.

But the problem is, of course, that if this even this proposal, which the Senate GOP would likely pass based on what Mitch McConnell has been saying… We simply don’t have the time.

So you’re probably wondering what now?

What happens if we go past that date, which is anywhere from May 29th to June 1st?

Well, here’s what CNBC has run the numbers on in week one.

On Thursday (June 1) and Friday (June 2), we have about $141 billion in government payments scheduled… And about $44 billion in taxes expected to be collected.

So about a $100 billion shortfall in week two.

We also have a lot of important spending, things like Medicare, food stamps, defense contractors getting paid, Medicaid, education programs and so on.

Now, the good news is tax receipts are expected to essentially match this spending in week two.

And it as you can see in week three, it’s similar, lots of spending, lots of payments, but it’s generally matched.

And then on June 15th, an estimated $79 billion in corporate estimated tax receipts come in. So the bottom line is that in June, the first month of a potential default, Moody’s estimates a $100 billion in net payments to 80 million Americans would be missed.

That’s the reason for the potential 2% GDP recession and 550,000 job losses.

This is why UBS thinks that the stock market in the first week could potentially fall 20%, what they believe is the maximum impact to the economy.

And then within three weeks and further, a 30% decline.

So what about the Fortress Portfolio?

Well, here’s how we protect you from a potential debt ceiling disaster.

Here’s why you can rest easy.

Long bonds and managed futures, as I’ve explained in recent weeks, are the best long term hedging strategy in history (at least since 1970). They do fantastic in basically every bear market.

In 2011, the debt ceiling crisis brought both up 30% while the market was down 22%.

Now, remember, that was the debt ceiling crisis in which the U.S. was downgraded from AAA by S&P and has remained AA+ since.

Now, Fortress Portfolio isn’t just about safe yield that you can trust and rely on to pay bills… In even the most turbulent economic times and catastrophes like a potential debt default could cause, I might add.

The beauty of having these hedges is that it lets you mint free money to buy bear market blue chip bargains.

Because historically, for every 1%, the S&P falls, this hedging combination goes up an equal amount.

So, for example, historically stocks fall 34%. This hedging bucket goes up 34%.

So the power there is that when you can rebalance the hedging bucket and I’ll show you how in a few weeks in another video this can boost your long term income and returns by 20% after taxes.

That’s because you’re basically taking that free money that you’re minting and you’re buying blue chips at the highest yields, the best valuations and the strongest future returns.

So instead of 10% returns with a 6.6% yield and half the peak declines of the S&P and bear markets, you could potentially be looking at 12%. Those are Nasdaq like returns with a 6.6% yield and one third the peak declines of the Nasdaq in bear markets. All while enjoying a yield that’s four times that of the S&P, five times that of the Nasdaq, and three times that of a 60/40 retirement portfolio.

Fortress is basically the easiest way for average people like you and me to sleep well at night, no matter how stupid the Kabuki theater out of D.C. gets… Or how badly the government might blow up the economy.

Fortress Portfolio is your port in not just this storm, but in the coming recession, which Jamie Dimon calls an economic hurricane… One that, he thinks will start in Q4.

While Bank of America’s CEO, Brian Moynihan, thinks July along with Ed Higham of Evercore ISI, who is the most accurate economist of the last 42 years.

Look, I don’t just watch Bloomberg, so you don’t have to. I watch C-SPAN, so you don’t have to. And believe me, you don’t want to. I spend 2 hours a day collecting economic charts from five different sources.

And that’s on top of analyzing 500 companies for a safety and quality in order to always know the best recommendations for Fortress members.

That’s because, to paraphrase Game of Thrones… I am your watch. You’re on the walls. I am your shield that guards your life’s treasure. And I pledge my life and honor to Fortress Portfolio members and your protection for this night and all nights to come.

Because after all, the night is dark and full of terrors. And these are dark times, but not for Fortress members.

Finally, please remember to send in your questions and feedback so I can respond to them in these videos and our monthly issues.

Just a reminder, I can’t legally provide personalized investment advice.

Thank you again for joining us this week.

I hope you join us next week for part four of our mini-series on the debt ceiling when we look at what the government can do to avert disaster if Congress fails entirely.

But until then, this is Adam Galas, wishing you and your family safe investing and a healthy, joyous, relaxing, and most importantly, debt default-free Memorial Day weekend.