Debt Ceiling 2017: How Congress Created an Even Bigger Problem

Last Wednesday (May 3), Congress averted a government shutdown by passing a stop-gap spending bill. While many investors turned the page, the "debt ceiling 2017" was left unsolved, and that will create a much bigger problem in October.

debt ceiling 2017

The debt ceiling and the government spending deal are separate issues. But some mainstream news outlets treat them as the same...

For example, Nasdaq posted a headline on May 1 reading "Futures Buoyed by Deal to Raise Debt Ceiling." That Nasdaq headline was wrong; Congress didn't raise the debt ceiling.

Here's how Congress actually made the debt ceiling crisis even worse, despite what you may have heard from the mainstream media...

The Debt Ceiling Clock Is Still Ticking

The 2017 debt ceiling deadline will likely be reached in October, the same time the latest government spending deal expires. So Congress will have to deal with both a potential government shutdown and default at the same time.

The government hit the debt limit on March 15. Since then, the government has been using "extraordinary measures" to keep the government solvent. This is a process where the U.S. Treasury Department tries to free up money by selling off assets and delaying payments to certain programs, like the government's retirement fund. But the government will be forced to default on its payments if something isn't changed before the debt ceiling deadline.

If another agreement isn't reached, the government risks shutting down again just as it risks default.

The government can't borrow any more money without raising the debt ceiling. Without more money, the government has to pay for all of its expenses with the cash it has on hand. Since the government runs a deficit, it can't make all of these payments without borrowing more money.

The government gets a boost to its reserves in April when annual tax payments come in, but as expenditures mount through the year, the government slowly runs out of money. Last April, the government's revenue was $438,432,000,000, nearly double May's revenue and 26% more than December, the next most lucrative month.

debt ceiling

The Bipartisan Policy Center estimates the government won't be able to pay for all its obligations by around October 2017. That's because the government has a huge payment to the Military Retirement Trust Fund due in early October. Last year, the payment came on Oct. 3 and totaled $81 billion.

Trending: President Trump's Tax Returns Remain Prime Target for Congressional Dems

A big payment like that will deplete what's left of the government's funds. It also means the government won't be able to pay for the next big bill due, which could be its bimonthly interest payments. Those payments are expected to total over $23 billion in October and will be as high as $88 billion in December. Congress will need to lift the debt ceiling before October or the government could potentially default on a payment.

You see, Congress' latest spending measure only funds the government through the end of September. If another agreement isn't reached, the government risks shutting down again just as it risks default.

Of course, Congress can avert a potential shutdown crisis by passing a budget or raising the debt ceiling before then. But both of these issues have become controversial, making it unlikely Congress can act quickly on them.

The Senate has only passed one full budget in the last seven years, when Republicans passed their 2015 budget. Instead, yearly appropriations bills have been replaced by short-term continuing resolutions. At the same time, Congress' raising of the debt ceiling is no longer routine, and it led to gridlock in 2010, 2011, 2013, and 2015.

Congress will have to deal with two high-stakes issues simultaneously in order to avoid a default or shutdown this year. Even with a Republican majority in both houses of Congress, that looks to be difficult. Instead of passing a full funding bill this year, Congress narrowly avoided a government shutdown on April 28 with this short-term fix, and they needed to extend the deadline a week to do it.

On top of disagreements among Republicans over spending, there's also disagreement over the debt ceiling. President Trump's new director of the Office of Management and Budget, Mick Mulvaney, has previously said he's unconvinced a failure to raise the debt ceiling is a bad idea.

"I have yet to meet someone who can articulate the negative consequences," Mulvaney said amid the 2010 standoff.

Unfortunately for investors, Mulvaney is very wrong.

Trending Now: Will the Stock Market Crash Soon?

Investors need to keep an eye on the debt ceiling developments, because it could cause markets to dive. Not only did Standard & Poor's downgrade U.S. debt after the 2011 standoff, but the stock market dropped as much as 10% in the weeks preceding the 2011, 2013, and 2015 crises.

And if Congress can't reach a deal and the government defaults on its debt, stocks could fall much more than 10%. But investors can prepare, and even profit, with the right strategy ahead of a debt ceiling crisis...

How Investors Should Prepare for Debt Ceiling 2017

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The threat of default over the debt ceiling and government shutdowns have sent stocks tumbling in the past. But investors shouldn't panic and flee the stock market.

Money Morning Chief Investment Strategist Keith Fitz-Gerald says owning well-managed companies in the "Unstoppable Trends" is one of the savviest moves investors can make.

The trick to making huge profits is to find "must-have" companies that fall into what Fitz-Gerald calls the six Unstoppable Trends: medicine, technology, demographics, scarcity and allocation, energy, and war, terrorism, and ugliness (also known as defense). The Unstoppable Trends are backed by trillions of dollars that Washington cannot derail, the Fed cannot meddle with, and Wall Street cannot hijack.

Because stocks in the Unstoppable Trends are hooked to industries always in demand, even if a government shutdown or default causes other investors to panic, these stocks will stay strong. If these stocks dip alongside the overall market, Fitz-Gerald looks at it as an opportunity to buy some of the best stocks at a discount.

Here are two of our favorite stock plays from the Unstoppable Trends.

One of Fitz-Gerald's favorite stocks from the Unstoppable Trend of war, terrorism, and ugliness is Raytheon Co. (NYSE: RTN).

Raytheon is a leading defense contractor with billions in contracts with the U.S. government and countries across the world. What makes Raytheon so unstoppable is security is a constant need for countries across the world, no matter what's going on with congressional budget battles. That means if the market falls, Raytheon is going to bounce back because its services are always in demand.

While Raytheon has billion-dollar contracts with the U.S. government, it's diversified with contracts overseas. International customers make up just under half of its business portfolio. Even if a few countries slow defense spending during an economic downturn, RTN still has plenty of other customers to help it weather the storm.

Another reason Raytheon is a strong play right now is one of Congress' spending battles is over how much more money will go to defense. President Trump's budget proposes a $54 billion increase in defense spending. Even if Republicans compromise on a lower number, Raytheon is still poised to gain.

RTN currently trades at $158.93, and it's up 12% on the year. It also pays a healthy 2.01% dividend yield, which adds some extra income for its owners.

Microsoft Corp. (Nasdaq: MSFT) is another leading company in the Unstoppable Trends.

Technology is an Unstoppable Trend because the world, and the economy, can no longer function without it. Whether it's connecting to the Internet through smartphones, streaming TV at home, or sending an email at work, individuals rely on technology daily. That doesn't include the countless other ways technology makes the world run.

Microsoft has been a mainstay in the technology industry since the company went public in 1986, and it isn't going away anytime soon. Microsoft has some major advantages in the tech field. Its Windows software is the operating system of choice for the majority of the world's businesses and consumers. It's also innovating. As cloud computing and the "Internet of Everything" grow, Microsoft is becoming a leader in the cloud space.

Microsoft's new Azure cloud platform is already the second-largest cloud service in the world, and it's poised to fend off its rivals by integrating already widely used Microsoft software. CEO Satya Nadella calls this "Software-as-a-Service." So even if the market dives, Microsoft services are still going to be in demand.

MSFT trades at $68.46 a share, and it's up 10.17% on the year. MSFT boasts a 2.28% dividend yield, too.

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