Another Weekly Session with Loui, our Head of Research was insightful. He provided some explanation to the US debt ceiling issues, and commented on several companies (SEA, BABA, TENCENT, BAIDU), giving his views on the upside or downside risk of the companies.

To provide you with the context of what is a debt limit, here is a scenario.

For example, if an individual has RM2000 of income, he is able to borrow RM100,000 from the banks. However, if the individual wants to increase the RM100,000 limit to RM200,000 from the banks. The banks may say no as he has only RM2000 of income, unless he grows his income to RM4000. This is not an apple to apple comparison, but it is a simple analogy of the borrowing limit. For a government, many other things are to be considered.

Here are some of the key highlights of the session:

Debt Ceiling Negotiations

The US Debt Ceiling stood at USD31.4 trillion and was hit in January-2023. Hence, the US government cannot legally borrow any more money unless the debt ceiling is raised another round.

**To recap, since 1917 the debt limit was at USD11.5bn and was raised more than 100 times.

Who can raise the debt ceiling?

It is being voted in the House of Representatives. However, when the ruling party does not have a majority in the House, there is no guarantee that an agreement will be reached. Currently, the majority is Republican with 222 seats vs. the Democratic party which has 213 seats.

Some requirements are to be met before the debt limit would be raised. On April 26, the House approved a bill to raise the debt ceiling by USD 1.5 trillion, but only with the condition that spending would be cut to 2022 levels.

What happens if the debt ceiling is not raised?

If the US government can’t borrow anymore money, the government will stop being able to cover all of its costs.

Based on Janet Yellen’s statement, the US Treasury’s cash balance at the end-April 2023 was at USD316bn.

If the cash runs out, the US may rely just on tax money, which may not be able to meet all of its public spending obligations, paying public sector salaries, or service all of its existing debt.

Hence, if the treasury bonds due in June do not get repaid, it may trigger a financial turmoil.

Well, Loui commented there could be other solutions to delay the issue, which is shutting down the government, which has happened before in 2018-2019, when the Trump administration shut down 35 days of the government to preserve some cash in hand. Of course this is not ideal, but it is one of the solutions.

Implications if the debt is defaulted

Many countries owned US debt, Japan (USD1.1 trillion), China (USD867bn), and Hong Kong (USD654bn). It may spike the borrowing costs in the US and around the world, while the safest asset turns less safe and it might spillover to the rest of the financial markets.

Is this time different?

In 2011, the US debt was at 65.8% of the US GDP, now it is at 98% of the GDP, and interest rates are elevated as compared to 10 years ago.

Both of these factors could mean the US government faces much higher debt servicing costs and more challenges than the past 10 years before the interest rate up-cycle.

“X-day” nearer, what can the traders do?

Ticker	ETF Name
BND	Vanguard Total Bond Market Index Fund ETF
AGG	iShares Core US Aggregate Bond ETF
TLT	iShares 20 Plus Year Treasury Bond ETF
GLD	SPDR Gold Trust
IAU	iShares Gold Trust
GDX	VanEck Gold Miners ETF
NUGT	Direxion Daily Gold Miners Index Bull 2X Shares
SPHD	Invesco S&P 500 High Div Low Volatility ETF

These are some of the instruments that a trader could utilize under this debt ceiling theme.

Besides the debt ceiling topic, Loui also commented on several companies' pre- and post-results reviews. Hence, if you would like to have more information about SEA, BAIDU, BABA, and TENCENT, you may replay our live stream: Mplus Online TV.

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