Well, here we are.

It is the weekend before the US Treasury Department will begin running out of cash to pay its obligations according to the Treasury Secretary, Janet Yellen.

Secretary Yellen has now changed her projection to June 5th which is suspiciously just enough time for a purported deal to be passed through both houses of Congress.

As ever in Washington, DC, when you run out of road and reach the end of the cliff the answer is simply to build more cliff - out of thin air if necessary!

Not great.

Whatever you do, just don't look down, like Wile E. Coyote in Looney Tunes:

Anything is possible in cartoons or government as long as you control writing the script.

However, at the time of writing (Sunday afternoon) it would seem that an "agreement in principle" has been reached. After promising not to negotiate over spending the Biden administration is sensibly doing that and agreeing to "cap" spending for the next two years or so.

How much spending and where will the necessary cuts come from are the big points of contention. We will have to hope the Democrat controlled Senate agrees with what the President has negotiated.

​Here is a draft for those interested.​

We certainly don't have an edge and it is likely that the purported deal will continue to change as the Senate weighs in this week but it looks like, roughly:

• The Biden White House has offered to freeze discretionary spending overall but the Republicans actually want to increase discretionary military spending and cut discretionary non military spending.

• ​On that front, the Republicans have agreed to getting less of an increase in defense spending (~3%).​

• In fiscal year 2024, it would limit military spending to $886 billion and nonmilitary discretionary spending to $704 billion. In fiscal year 2025, those numbers would rise to about $895 billion and $711 billion.

• ​The Democrats are reducing the amount of money they are sending to the IRS via the Inflation Reduction Act.​

• Work requirements for entitlement and welfare programs were apparently the big sticking point and SNAP benefits (food stamps etc) will now include a work requirement up to 55.

The good news, as we argued over the last few weeks, is that there was a good deal to be made and it would appear that both sides have been busy making it!

What else to say?

1. The first thing to say is: this is great and we hope a deal goes through and removes this threat to the US economy and the good standing of the US credit rating for two years or more.

2. The second thing to say is pay close attention to our point last week about the danger when the market gets a nasty surprise it wasn't expecting. Volatility could still occur as Congress is very divided and very willing to say and even do dangerous things. This looks very unlikely now but never say never.

3. Passing a deal takes time in DC. This isn't getting a lot of press while all the attention is focused on the binary will they/won't they question and not enough on the question: can they get it done before the Treasury has to start making tough decisions.

Secretary Yellen has built more cliff to the 5th and presumably she could again. The Treasury can get very creative with the national accounts and keep things at least obscured for a matter of days but if anything serious should derail matters then we are likely out of road....

If this purported deal falls through or even looks wobbly into the holiday Monday or Tuesday then a real panic could begin.

We doubt that this will occur but no one else believes it either and within that (big) assumption lies a real threat. Keep that in mind.

The good news is we are on the cusp of this being a "nothing burger." We are just about to start feeling real regret at giving in and giving this pathetic topic so much space here. We caved and we aren't proud of it here at Pebble HQ, what can we say?

So, what to do? What can you even do?

This will sound dumb or even crazy but we continue to like buying US bonds. There are many options there but we have typically recommended buying short term bonds and Treasuries for the yield.

Now we like going further out the yield curve to medium or long term debt.

Why buy US bonds?

Well, first off, we do not think the market will react ecstatically to the debt ceiling deal. The base case has been that a deal would be done and so the risk was a big move DOWN, not UP.

Two further reasons:

1. Growth, though resilient, is finally slowing. If the recession does come then bonds could rally very swiftly and put in a strong performance.

2. Even if the economy hangs in there it is very possible that the % yield from the bonds will pay off and net out any future increases in rates (that would cause bond prices to decline).

Bonds have been the "wrong" play for most of the year but we think that will now change in the months ahead. We like the "heads you win, tails they lose" aspect to them where you can get 3-6% in yield if they stay roughly flat and quite a bit more if the recession does come and bond prices rally quite hard over the next few quarters.

Lastly, if you have successfully bought the short term Treasury bills that offered extra yield because of fears around an early June default, we salute you! You backed sanity and the good faith and credit of the United States of America and this Memorial Day, that feels both fitting and a cause for celebration.

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Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.