I have been somewhat closely following the deliberate debt ceiling drama from Congress since it started a few months back. Most others, it appears, have not. Throughout this slow-motion drama, markets have continued their relentless bear-market rally and the VIX has subsided to levels only seen rarely in these recent years. The VIX, to remind you, is also known as the “fear index”: when low, investors are fearless; when high, full of fear.
Janet Yellen, our beloved Treasury Secretary, announced yesterday that the government may begin to default as early as June 1st, far earlier than previously expected. Tax Receipts are coming in light, government expenses continue apace, and the spigot will run dry in about four weeks. FOUR WEEKS. How did the markets react? They didn’t. Granted, when this happened in 2011, markets didn’t really start tanking until two weeks prior to the deadline, but nothing?
Perversely (given my extremely bearish position), I am hoping for the drama to play out to the last minute. I will watch with glee as the market tanks day after day as the hapless congress fails to make any meaningful efforts to get this done.
No-Win for the Economy
Regardless, it is a no-win situation for markets. For example, suppose the Democrats and Biden agree to the full proposal passed by McCarthy last week. Suppose we cut government spending drastically starting with rescinding student-loan forgiveness. Less money coming into the economy, more money coming out of consumers’ pockets to pay for things the government was previously helping out with. How does that affect spending, growth, etc.?
Well, I’m not a genius, but I do know that this will have a very negative effect on spending, growth, company revenues, company profits, and all of this in an already-slowing economy with inflation still way too high.
I am expecting some significant shocks in the coming month, so my trade is the VIX. At these levels, it makes sense to hedge some of this upcoming drama and I am buying mid-June Calls at 20.