How to Profit During the US Debt Ceiling Crisis of 2023

Are you looking for an opportunity to make a profitable investment during the 2023 debt ceiling crisis? The debt ceiling crisis can be challenging to navigate, but it can also give potential investors an excellent opportunity to invest wisely. With the right strategy, investors can potentially make a decent profit from the current situation. This blog post will explore how to make a profitable investment in the debt ceiling crisis.

US Debt Rating will be Downgraded in August 2023

The US Bond Credit Rating will likely be downgraded in August 2023. Why August? There is an annual cycle to tax receipts. In a typical year, US tax income exceeds outflow from February through June, first because of income tax receipts and second because of corporate tax receipts. High-income taxpayers often pay later, leading to high revenue months long after the little people have filed.

So the first month of net outflows is July. Because of the July 4th holiday, and the vacation schedule of high government officials, there are never any financial crises in July. All July action is deferred into August. Even in August, most financial decision-makers are on half schedule, and except the 2008 failure of Bear Sterns, there is rarely a need to watch the market in the Summer months.

Having the US credit rating downgraded is not a default. Default means the US fails to make its payments on a regular basis. That is not going to happen. A default would be so catastrophic that even small-minded greedy, immature Congresspeople would not let it happen.

The credit rating is a warning system. This rating is in the hands of Bond Rating agencies. One or more of them will do what happened in 2011 under the same conditions – say that the US government cannot be trusted for future payments for all time – and their bond rating needs to reflect that reality. That is a reality created by small-minded greedy, immature Congresspeople, and they should be ashamed.

In 2023, US Tax receipts are a bit lower than usual, but also, some tax receipts may be delayed because of the delayed Tax Filing date for Californian taxpayers. Since California’s economy is bigger than all but four world countries, the income tax deferral may buoy summer revenues for the US.

The US Bond Rating Downgrade of 2011 took place on August 5. Since the ebb and flow of taxpayer revenue is fixed to the Calendar year, August 1 through August 23 are the most likely time for this year’s crisis. If there is no downgrade in August, the situation may be deferred until October 28th, but when it happens the effect will be much worse than a mid-summer rating change. That is why it will likely be in early August.

What Will Happen When the US Bond Rating Is Downgraded?

A downgrade of the US government’s bond rating default is a catastrophic event and will shock global markets. You can expect US Domestic markets to lose 6-10% of their value in one day. When S&P downgraded US Bonds in 2011, the downgrade tanked European and Asian markets as well as US markets. Stocks, Bonds and Treasuries all dropped simultaneously.

A downgrade in creditworthiness results in higher borrowing costs for the US government. A downgrade in creditworthiness will balloon the federal debt. The higher debt-to-income ratio will far exceed the debt added during the covid crisis. It is a factor in the cycle that lowering the Bond rating and makes the circumstances to make debt payments more complex, leading to further lowering the Bond rating. Everyone who has entered bankruptcy court has learned this.

Whether the US government can pay its debt directly affects taxes, GDP and Government income. Just like a missed credit card payment leads to higher interest rates for a person, when Congress plays games with the debt ceiling, it will result in higher borrowing costs for every US taxpayer. Consumers will feel a direct impact for the following decade as interest rates on mortgages, credit cards, and car loans go up.

Which investments are affected

During the 2011 crisis, Stocks, Bonds and Treasuries all dropped steeply. Markets in Europe, Japan and China also dropped. A falling tide sinks all boats, so count on safe-haven investments like Gold and Bitcoin to drop steeply.

Unlike in 2011, our markets are dominated by much higher levels of leveraged assets. Leverage is when a brokerage firm borrows funds to make a “safe investment” on a leveraged asset. When the asset drops, a margin call occurs, and the brokerage house must sell their leveraged asset, even though it is “safe”. The deleveraging process means that safe assets fall along with risky assets. I learned this personally when I lost $75k in gold stocks during the 2020 Covid crisis. I had centered my assets in Gold Stocks, thinking their value would rise when the world shut down. Gold dropped the same day everything else dropped. Deleveraging stole my money. Lesson learned.

Second, the US debt default will affect bonds. Bondholders will be the first to experience a significant impact. Bondholders won’t get paid if the government can’t repay its debts. This can cause bond prices to plummet, and investors will lose money.

Third, existing Treasury bills will also be affected. Investors in Treasury bills may not get paid their interest or principal, leading to significant losses.
However, future Treasury bills will pay greater dividends as they become riskier investments. This is because investors demand a higher interest rate for the additional risk they take on.

It’s important to note that US Debt default doesn’t just impact investments in the US; it can have significant impacts worldwide. Awareness of the global effects and their impact on investment decisions is crucial.

How to Profit on Stock Declines

As we approach the inevitable lowering of the US Bond rating, smart traders plan on profit-making. While the stock market may initially react negatively to a default, savvy investors can profit from these declines. Here are some strategies to consider:

Preserve Capital: If the market drops 40% and you only drop 20%, then your net gain compared to the market is 20%. Prior to August 2023, you may be wise to move your capital out of Stocks, Bonds, Commodities, Safe Havens and all other non-cash vehicles. One could make a case to diversify into foreign currencies. However, a close look at 2011 indicates this would have yielded a marginal gain – maybe 2-3%.

Short Selling: One way to profit on stock declines is to engage in short selling. This involves borrowing shares of a company and selling them with the hope of buying them back at a lower price later. If the stock market declines in response to the US default, short sellers can profit by buying back the borrowed shares at a lower price.

Defensive Stocks: Another strategy to consider is investing in defensive stocks. These are companies that are less sensitive to economic fluctuations and may benefit from a decline in the broader market. Examples of defensive stocks include consumer staples, healthcare, and utilities.

International Investments: It’s also important to diversify your portfolio internationally. International markets may be less affected if the US stock market declines in response to the default. Consider investing in emerging markets or established companies based outside the US.

It’s important to note that any investment strategy comes with risk, and it’s impossible to predict how the stock market will react to the US default. Congress could pass a last-minute agreement to avoid default, which could positively impact the stock market.

How to Profit on Treasury Bill Declines

One of the most straightforward ways to profit from a US debt default is by shorting Treasury bills, or T-bills, as they are directly tied to the government’s debt. When the government defaults on its debt, it will likely affect T-bill yields, resulting in a decrease in the value of these assets.

To profit from T-bill declines, you can consider short-selling them, which involves borrowing T-bills and selling them on the open market, anticipating a price decline. If the T-bill value falls, you can repurchase the T-bills at the lower price and return them to the lender, keeping the difference in price as profit.

Another option is to purchase put options on T-bills, which give you the right to sell them at a predetermined price, known as the strike price. If the T-bill value falls below the strike price, you can exercise your put option and sell your T-bills at the higher strike price, again profiting from the price difference.

In summary, shorting Treasury bills can be a way to profit from US debt default, and you can purchase put options on T-bills. It’s essential to understand that the T-bills value will be unstable, and you can take advantage of it. If you have cash, you can invest in T-Bills during the crisis and ride it as the crisis ends due to government action. Remember, TV financial advisors will never tell you about these things in advance and will already have moved their money before they tell you what you should do. Jim Cramer does not make money listening to his advice.

How to Profit from Credit Squeeze

In the event of a US debt default, one of the immediate impacts will be a credit squeeze. Banks will be reluctant to lend money, and those who need credit will struggle to get it. As a result, the market for corporate debt will dry up, and many credit-hungry corporations will fail. This will, in turn, cause banks to collapse.

However, you can still profit from the collapse of the credit market. One way to do this is to short-trade the banking sector and other sectors that rely heavily on debt financing. This means betting that the price of their stocks will decline.

Short selling works by borrowing company shares from a broker and selling them on the market. The investor then hopes the stock price will decline, allowing them to buy back the shares at a lower price and return them to the broker, pocketing the difference as profit.

Avoid investing in precious metals or cryptocurrencies. Quants heavily trade these vehicles, and when they have to cash out, they will destroy the value of “safe investments”. For everyone who does not nosh at Davos, there will be true pain as years of slowly earned income are washed away by a few irresponsible politicians.

In summary, a US debt default will cause a credit squeeze, leading to a collapse of the credit market. However, you can still profit by short-trading the banking sector and other sectors reliant on debt financing. As with any investment strategy, it is essential to do your research and seek the advice of a financial advisor before making any decisions.

Summary

When Bond Agencies lower the US Bond rating in August 2023, the pain will be felt by every American worker and taxpayer. Careful planning may make it possible to lower your personal pain, and maybe derive some offsetting profit. By understanding the similar 2011 crisis, and examining options or investments that went up in that circumstance, investors can maintain their asset value and possibly profit from the crisis.

Strategies such as shorting stocks, shorting gold and other “safe” commodities, or investing in foreign currencies can generate returns. With the right strategy, smart investors will see 2023 as a positive year for portfolio growth.