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The Crisis View 

The black swan isn't going to be CRE. People are looking at the wrong thing. It's going to be the debt ceiling. There is no way there won't be chaos. It will go to the last minute.

— Tracey Ryniec (@TraceyRyniec) April 17, 2023

"The black swan isn't going to be [commercial real estate] CRE. People are looking at the wrong thing. It's going to be the debt ceiling. There is no way there won't be chaos. It will go to the last minute."

For starters, CRE will not be a black swan for the same reason the 2008 Great Recession was not a black swan: Too many people saw it coming, including me. 

Importantly, people seeing the Great Recession in advance didn't stop it. And far more people were talking about the housing bubble than they are talking about CRE now.

With that, let's return to the chaos view. 

Summer Worries

Joyce Chang, JPMorgan Head of Global Research, is on CNBC addressing the debt ceiling issues. She agrees with me that it will come down to brinkmanship. She sees the deadline in August (same as 2011) so markets will start to "worry" in early summer. #stocks

— Tracey Ryniec (@TraceyRyniec) April 17, 2023

Worries or brinkmanship are not the same as chaos.

Debt Ceiling Is Bunch of Nothing

I respectfully disagree with this assessment, before listening to the interview. So, I reserve the right to revise this based on what is said. But based on what is above, I do not agree.

For now, the market thinks the debt ceiling is a bunch of nothing. I agree with the market.… pic.twitter.com/S2Af4aYLBX

— Jim Bianco biancoresearch.eth (@biancoresearch) April 17, 2023

"For now, the market thinks the debt ceiling is a bunch of nothing. I agree with the market. It can become something later on, but it is not now."

That is the proper view. 

Not Now or Never?

That is the proper question. Even if things go down to the wire, there is no guarantee of chaos. 

Three Possible Resolutions

1. Republicans Cave
2. Democrats Cave
3. Both Sides Give Something

Even if resolution heads into overtime there is no implied chaos. We have been into overtime before without chaos. 

I am not even sure what chaos means since it hasn't happened before. Is it stock market related, bond market related, a global selloff? 

If it's about stocks, they are due for a sustained hit anyway. 

Will Republicans Cave?

That was once my base case for two reasons: They always have, and they have a a slim barely workable coalition in the House.

But now I have changed my mind.

Debt-Ceiling Standoff Prompts Backup Plans, but They Face Hurdles Too

The Wall Street Journal comments Debt-Ceiling Standoff Prompts Backup Plans, but They Face Hurdles Too

There is no clear escape hatch to avoid default if Congress doesn’t pass legislation raising the debt ceiling. 

President Biden and Democrats want to raise the debt ceiling without any conditions. But Republicans are insisting on pairing a debt ceiling increase with spending cuts. The standoff has raised interest in possible alternatives that could help the U.S. avoid a default.

If the US defaults, I agree there will be chaos. I just highly doubt that. Here are some avoidance ideas.

Unilateral Executive Action

Some academics have pondered whether the White House could simply ignore the debt limit. They say that the debt limit is inconsistent with another congressional command to the executive branch: to use money as Congress directs it to in spending legislation. 

14th Amendment 

Some legal experts also believe that the president could invoke the 14th amendment, which says that the validity of U.S. public debt “shall not be questioned,” to keep paying the country’s bills. Former President Bill Clinton and former House Speaker Nancy Pelosi are among those who have said the White House could rely on the 14th amendment in a debt ceiling crisis. 

Prioritization

The Treasury Department started employing so-called extraordinary measures last month to preserve cash, with its latest estimate being such efforts can extend payments through at least early June. 

Trillion-Dollar Coin

Under a proposal that was initially dismissed as a joke but later migrated to the halls of Congress, the Treasury could use an obscure commemorative-coin law to mint a coin—say one worth $1 trillion — and deposit it at the Federal Reserve. The Treasury could then draw the money from the Fed to pay the nation’s bills.

Prioritization But No Chaos?

Republicans went to the brink with prioritization twice before. Neither time resulted in chaos. National parks and some nonessential services were closed. 

Both times resulted in Republican capitulation and humiliation. 

I strongly doubt the trillion-dollar coin idea gains traction and the Fed may very well issue a statement saying it will not go along with that idea. 

What About Democrats Caving?

I had ruled that out, but it is now in play because McCarthy's Demands are entirely reasonable.

Mr. McCarthy laid out House Republicans’ demands for agreeing to a debt-limit increase: They want Congress to place limits on federal spending, claw back Covid-19 aid and require Americans to work to receive federal benefits. Those measures will be paired with a debt-limit increase that will last into next year, Mr. McCarthy said.

“Let me be clear: A no-strings-attached debt-limit increase will not pass,” Mr. McCarthy said. “This will restore discipline to Washington.”

“The longer President Biden waits to be sensible to find an agreement, the more likely it becomes that this administration will bumble into the first default in our nation’s history,” Mr. McCarthy said.

Mr. McCarthy said House Republicans would try to revert federal spending on programs such as the military to last year’s levels. Going forward, growth on spending on so-called discretionary programs, which excludes Social Security and Medicare, would be limited to 1% a year, Mr. McCarthy said. 

The Wall Street Journal is whining that Mr. McCarthy didn’t distinguish between defense and social-welfare priorities.

Look, you either want to reduce the deficit or you don't. The Journal wants all of it to come out of social programs.

I find it more likely that none of it does.

The Way Forward

The way forward is for the House to pass something, anything actually, but preferably exactly what McCarthy stated.

Having passed something, it will then be on the Democrats watch in the Senate to let a default happen. 

Importantly, this is the opposite setup from when Republicans caved in twice before. 

What to Expect 

For starters, expect a lot more fearmongering and calls of chaos between now and June.

Then, in order, I expect 

1. A compromise with Republicans getting most of what they want
2. Capitulation or near-capitulation by Democrats
3. Capitulation or near-capitulation by Republicans
4. A default with chaos resolved within two days
5. Longer chaos.  

Votes of Senator Joe Manchin and Krysten Sinema are likely to be instrumental in Republicans winning outright or getting most of what they seek. 

Odds of default are somewhere between 0 percent and 2 percent. Yep, that would likely mean chaos. 

But whatever the resolution, don't expect much in the way of deficit reduction. Ultimately, the DC compromise is more social spending in return for more military spending.

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