“I don’t want to think what the outcome might be, because the consequences would be too dire” — Joe Biden

These were the warnings of the president of the USA Joe Biden before the possible default that he would face on October 18. This will happen if you don’t get the 10 votes you need in the Senate to suspend or delay the debt ceiling.

It has not been only the president of the United States who has warned of this danger. The US Secretary of the Treasury, Janet Yellen, has also warned that if the limit is not suspended, the US economy, and therefore the global economy, would suffer irreparable damage that would send the world into a deep financial crisis. This extreme situation already happened in 2011 and 2013 during the Barack Obama administration. It is true that at that time the country was still recovering from the crisis of 2008, and it was easier to get all parties to agree.
Yellen also added that if the debt limit was not raised, the government would run out of money around October 18.

Since 1960, the debt ceiling has been raised, suspended, or delayed 78 times. But this ceiling has increased significantly in recent years where it has gone from $8.1B in 2005 to almost $28.4B in September of this year.

From our point of view, it is most likely that both parties will reach an agreement that allows them to increase the debt ceiling since otherwise, the expenses approved by the Republicans could not be approved either. The President is also left with the ability to mint a billion-dollar platinum coin and deposit it with the Federal Reserve so that he could continue to pay the bills. This would be without the Republican votes.
Republicans want Democrats to approve an increase with their own votes, using the so-called ‘reconciliation’ process in Congress, but that could take weeks and Democratic leaders continue to insist that Republicans must join in to avoid a default.

What happened in 2011 was that the SP500 fell 6% as the deadline for raising the debt ceiling approached. Although once approved, he quickly made up for that drop, which is surely what will happen right now. On the contrary, if it is not approved, it is most likely that the interest rates on mortgages, car loans, or credit cards (among others) would have to be drastically increased.

What this fact does give us is a vision of how fragile the world economy is and that 10 people are capable of plunging a planet into a recession and leaving 50M Americans unable to collect a pension.

This event, although it is closely related, is what happens with the distribution of returns in the stock market, and it is precisely in the tails of the distribution, where we find these extraordinary returns. That is why at asymmetric finance we decided to invest in PUTs and CALLs very OTM since they allow us to benefit in these types of situations, which are much more likely than what the market estimates. If you want to know more, do not hesitate to subscribe to our private area where we hang our portfolio on a weekly basis.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.