Debt Ceiling Standoff: 3 Possible Outcomes ft. Chris Kerckhoff (EP.101)

0:28We all need to make smart decisions with our money. I was thrilled to be joined by Chris Kirkhoff, President and CEO of PlanCorp. Now, because Chris is a member of our investment committee at PlanCorp, the two of us speak pretty regularly about markets and world events, so we thought it might be fun to give others a chance to listen in on a conversation we might casually have in the office. And since the political breakmanship over the debt ceiling is gathering quite a bit of media attention, we decided to outline what we felt like for the most plausible scenarios for these debates and what it all means for investors.

1:01As always, you can find show notes and additional resources at thelongterminvestor.com. And now without further ado, here is my conversation on the debt ceiling with PlanCorp's President and CEO, Chris Kirkhoff. Welcome to the Long-Term Investor. Today, I am joined live with our CEO of PlanCorp, Chris Kirkhoff from Wealth Management Edge in Hollywood, Florida. Chris and I were just talking a little bit about the debt ceiling. And there's a podcast booth here that you'll be hearing me do other interviews in. I said, Chris, let's get in here and talk about the debt ceiling. So Chris, thank you so much for your time today.

1:42Appreciate you being on the show for the first time. Yeah, it's great to be here, Peter. Thank you. I know there's a lot of reasons people come to conferences. So I just kind of curious to get your perspective since we're here at Wealth Management Edge, what is it that you hope to get out of any conference you go to or this one specifically? Yeah, that's a great question, especially coming out of COVID and the pandemic. The decision to leave the office and travel for work is looked at quite a bit differently, I think. And I've got three kids that are really busy. So to leave town and leave them and leave the office, it's a big commitment.

2:16So when I come to a conference, what I'm looking at is a few things. One is who else can I connect with in industry? So I know much like you, there's providers that we work with on a regular basis, whether it's some of the mutual fund companies, ETF providers, custodians, there's a host of people that work with us to bring the client experience to clients and to provide an environment for our team back in the office too. So vendors, software vendors, things like that. So if we can connect with them all in one space, that's a huge benefit to us. But there's also a number of people in industry that I've gotten to know over the years, thought leaders that I love to connect with, hear what they're up to, and you can find all of them in one space, and that's excellent.

2:56For this conference, there's an added bonus, which was PlanCorp was thrilled to be named to RIA Edge's top 100. And that list is pretty unique, I think, because a lot of these lists over the years have developed, and they're just the largest 100 firms. And we often make it onto those lists as well. This was much more qualitative in nature and how they came up with this list. So excited for us to be honored in that way. And then of course, finally, we do have an advisor here locally. So the opportunity to connect with her while we're here, hopefully connect with a client or two. It's another opportunity to get out and just see people in person.

3:32Yes, the RIA Edge 100 list. I'm glad you mentioned that's a little different because they're factoring in company growth in assets, as well as some different client ratios and certifications and things that we really take seriously at PlanCorp. For those of you listening, I have an article and an interview on that award that I'll link to in the show notes at thelongterminvestor.com. And much like you, Chris, when I come to these conferences, I am trying to batch meetings with providers because every day I would like my calendar to be more available for our clients and for our colleagues at the office.

4:09And obviously, as you're managing client assets, these investment providers, they want to meet with us all the time. They're always visiting our home office in St. Louis. But here I can meet with 15, 20 different providers, be a little bit more distraction free on my day-to-day work and dedicate my calendar again to my colleagues at Plaincorp and our clients. And it's a great way to take a big, broad look at all of the products out there. There are 15 ,000 different products. And so I think what a lot of our clients don't understand about what you and I do, Chris, because Chris, for listeners who don't know, Chris also sits on the investment committee with me and has for all I know his entire career.

4:49You might have been the investment committee at one point in time, but at our size, I think some people are surprised to hear that the CEO is on the investment committee, but Chris's investment knowledge is so deep. And I think that what people don't realize about what we do on the investment committee is we look at so much. And I think our job is more to say no 10 ,000 times for every one time we say yes. And so the portfolio doesn't change that much year to year. The philosophy remains the same, hopefully over decades. It has for 40 years. It's hard to picture given you're at my age that it would change philosophically, but the products can change.

5:26And that's why we're here to get some of our 10 ,000 nos in, so to speak. Yeah, absolutely. People talk about the evolution of technology, and obviously it continues to grow exponentially. And alongside that, the different solutions to come to the same end philosophy or to support the same end philosophy is also true. The solutions just keep growing. And it's really an exciting time to see that matchup of technology and investment solutions come together, all for the benefit of the client at the end of the day. Well, and so I pulled you into the podcast booth, Chris, to talk about the debt ceiling.

6:00You know, just to give listeners a little background on what the debt ceiling is, I think that can help frame the conversation. So the debt ceiling was instituted in 1917, really just to provide more flexibility to finance the United States involvement in World War I. And prior to the debt ceiling, believe it or not, Congress directly authorized each individual debt issued. And I can't imagine if Congress had to approve every single treasury bond issuance. That would be insane, especially if you look at headlines today. And, you know, so Treasury securities, they're offered multiple times a week.

6:33And so just the nightmare of keeping the government funded would be impossible. So the Second Liberty Bond Act of 1917 removed the need for the individual approval of each bond issued. But it also introduced limits to the total amount of money the United States government could borrow to meet its existing legal obligations. And so the debt ceiling, just let's get the definition out there, is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations. And those obligations include paying interest on the national debt, Social Security and Medicare benefits, military salaries, tax refunds, and all sorts of other payments to the continuation of public goods and services.

7:15Now, the debt ceiling is obviously different than the budget. The budget gets passed every year, has nothing to do with authorizing news commitments. But as anybody who ever watches anything on the media or reads a newspaper, they know that Congress is negotiating. And whatever party is in power, the past several times around with this debt ceiling situation has sort of been held hostage, so to speak, with some political demands. And I think when I am hearing questions from clients these days, it's easy to be fearful of the what if. And Chris, obviously, like me, you remember 2011, where it was the first time where we got close to that what if U.S.

7:59Treasury debt was downgraded. And then I think that S &P 500, working from memory here, was down 19.6 % on a closing basis. Maybe it crossed that official bear market intranet. Yeah, just barely, I think. Yeah. And so and then we were off to the races right when we were worried about the downgrade of debt. But today, I don't know if it's the media coverage that makes it seem a little bit more anxious or more tense of a situation. But I thought what would be fun is something that you and I might do when we're sitting in your office anyways, which is just sort of talk about the different potential outcomes, much like a trader would.

8:34Professional traders, you have to give them some credit. it, they place odds on different outcomes occurring and they buy and sell accordingly. That's actually how so much information gets incorporated into price. And what I'd like to do is throw out these non-zero probability events that could, I suppose, happen, but are very unlikely to happen. So we're not going to talk about a situation where the really, truly worst case scenario where they don't raise the debt ceiling ever and the world comes to a crashing, burning end. We're not going to discuss that one. And also, I think it's unrealistic for us to be sitting here and pretend that Congress is going to increase the debt ceiling before we publish this episode.

9:15But I do think, let me just interrupt you real quickly. I think going back to the 2011 event, I think two things I would just mention. One is that you mentioned what the S &P did during that period of time. And again, short term, and then it bounced back pretty aggressively. But what's really fascinating to me is treasuries were downgraded for the first time in the history of the country. And yet treasury yields dropped because the flight to safety still went into treasuries. So there's this issue of, OK, what did the ratings agencies do? You know, they downgraded the debt. Right. But at the end of the day, the safe place for investors, they voted with their dollars and they still went hugely into treasuries.

9:56I mean, it was a huge flow of money into treasuries at the time. So it's an interesting kind of bifurcation of you have what Wall Street may be saying about treasuries and what rating agencies are saying. But at the end of the day, global investors are actually voting with their dollars in terms of where they see safety. So it will be interesting if we get closer to that kind of proverbial edge this time, what happens in the treasury markets. And the other thing I'd mention, I think there's a recency bias with what's going on now in terms of the feeling that this time is different. I can tell you, I remember vividly being at a dinner actually in 2011, being interrupted by a client who called and was just absolutely freaked out about what was going to happen.

10:37And the news was really frothy back then. We were still very recently kind of scarred by the global financial crisis of 08-09. So there was a lot of concern at that point in time, I would say. And it was really the first time, as you mentioned, it's become almost like this every few years we get to have this theater in D.C. where they kind of play games with the debt ceiling in terms of the political standoffs. That was really the first time in my career that that had happened. So it was pretty precarious back then, I'll say. Well, and so this, I hope, is not a conversation that we have to have every year or every other year.

11:13I was actually scrolling through my podcast episodes and it looks like I did episode 17 on this. So this is not the first time I've had to talk about the debt ceiling in less than a two year span. And so I think, you know, if we were going to try to handicap for people to set their expectations, what might happen? And if you're a client of PlanCorp, you know that we have a financial plan. We use the financial independence analysis so that we don't have to speculate on how an event will turn out and what will the market's reaction be to how the event turned out, which, by the way, are two totally separate things.

11:47You can nail the outcome and be completely wrong on what the millions of market participants are doing in the different markets available to them, voting with their dollars, just like you said, Chris. So I'm going to somewhat arbitrarily say, like, what if we decided and we did not prep this listeners, we're live here at a conference. We decided on a 25 percent outcome, best outcome, 25 percent worst outcome and a 50 percent likelihood of most likely outcome. Maybe we'll both talk a little bit about where we see the best, middle and worst outcome. Why don't we start with the worst so that we can get more optimistic as we go?

12:21because I don't think, for those of you who don't know Chris, Chris is an optimist. And this is going to be painful for him to talk about. He's a realist. Being an optimist doesn't mean you have your head in the sand and don't recognize risk. But let's start with the bad stuff first so we can end on a brighter note. Let me start. I'll start for worst case scenario of something that's plausible in my mind would be that we missed the June 1 artificial deadline, that suddenly the Treasury finds more dollars to float us till June 15th when estimated taxes flow in. And if I'm going to get really draconian about it, say, okay, like we really do start, stop, excuse me, not start, but we stop payments to a lot of people.

13:01We don't ever stop paying interest on our treasury bills. When I think of the most plausible worst case scenario, I think that the treasury will do everything in their power to make sure that they keep paying interest on their debt. Everything else goes out the window. And I think market reaction is a whole lot of volatility. And in this worst case scenario, Congress eventually gets their act together, passes something, markets rally again, and then we're back to normal. That's sort of my most plausible worst case scenario. I think that's probably right, Peter. And I think the piece that makes it so certain that that's as bad as it can get is the fact that when you talk about what payments get held up in that scenario, you're talking about Social Security being one of the primary ones.

13:44Now, maybe it's not zero payments, but a reduction in payments is still very, very painful for much of the country that relies upon Social Security as a primary source of income in terms of retirees. So the political heat that comes with a big part of the voting bloc that actually votes, you know, getting a reduction in payments, that is a significant impact from a political standpoint. And that's one of the reasons I think that likely is as bad as it gets. I agree with you. The Treasury will do everything within its power to continue to make interest payments. And could this go into mid-June?

14:20Possibly. It feels like, and I have to admit, just since we're doing this on the fly, I didn't look at the calendar of Congress to see when they are in session, out of session. But I think before they break for their summer break, this will get wrapped up. And they could have to do a week or two of extensions to get there. But I think that's likely as bad as it gets, which would definitely royal markets as we get closer to that real precipice of when people start to feel actual pain from this, which I certainly hope doesn't happen. Because there's, as you mentioned earlier, this is not about the question of whether or not we are going to spend more dollars.

14:54This is how we're paying for the dollars that we've already committed to spend. And that is a big difference. And I think a whole different conversation is how much should we be spending? We're not going to tackle that one today. But this is just how are we going to pay for what we've already committed to? And that really should be a non-controversial issue, in my opinion. Well, I appreciate you really emphasizing that last point. And in these worst case scenarios where there's a lot of market volatility and maybe some temporary losses, market losses are so normal. And we never know why they're going to occur and when they're going to stop.

15:30And depending on how you define when a bear market ends, some people would say it's when a market bottoms. Some say it ends once it returns to its previous peak, which is sort of the definition I like to use. We're still in the midst of a bear market, but it sort of feels like ancient history to some extent that markets were down more than 20%. So this worst case scenario, the economy is still strong. It would cause some disruption, but at the point at which it starts to even smell catastrophic, I think Congress gets their act together. They're playing a game of chicken. And so that's that worst case scenario is that the game of chicken gets a little out of hand.

16:07Yeah. It's a terrible way to frame it that way, but that's unfortunately, I think that's right. Yes. And the best case scenario, I think is pretty simple in my mind. Would love your thoughts is that we come to an agreement to raise the debt ceiling before the 11th hour. I mean, is there any other way to color a most likely best case scenario? And I say most likely gently because it's hard to picture that happening, but maybe they do it two days before the deadline. You know, it's hard to read between the lines of the headlines these days. It sounds as though there is some possibility that there could be a deal struck that actually does include in it some guidance, I'll call it.

16:47I don't want to get too descriptive of it, but maybe some setting of new guidelines in terms of spending going forward to try and at least reduce some of the continued growth of the spending of the federal government. I mean, when you think about how much we spend each year, and I'm not going to get specific of where we spend it, it's just a huge number, right? I mean, we're north of$6 trillion now when you include everything. It's a big number. So I do think there is some possibility that we could see a deal struck where there's at least some description of how we might look at future spending, which could help, by the way, reduce the likelihood that we have these high-tension moments come up as often.

17:29I mean, they're there, they're going to happen. But if we can reduce them to every five years or six years instead of every, you know, 12 to 24 months, I think that would be beneficial for everyone. And so we've talked about a worst and best outcomes. I think you and I would agree, even though we haven't discussed it in advance, that we'll probably land somewhere in the middle. So why don't you start this time? What do you feel like is our most likely scenario? And look, we can't predict the future. This isn't going to impact how we manage portfolios or do financial plans. But just as people are reading the headlines, how do you think about it as someone who follows the political?

18:08Sure. I think the most likely outcome, Peter, you alluded to this June 1st deadline as an artificial deadline. I would call it a best estimate deadline, right? I mean, know, we don't know when you think about the trillions of dollars that it floats around and it just comes to mind immediately, like that the end of last week, the Defense Department found $3 billion that they kind of miscounted. So these rounding errors are quite large when you get to the federal government side of things. So whether June 1st is actually correct or not, no one really knows at this point. But I think the most likely kind of middle of the road scenario is we right around June 1st or within a week of June 1st, I'll say, past June, no longer than let's say June 7th, June 8th, that the president and Congress do actually come together and decide that they're going to increase the debt ceiling.

18:58And I think there seems to be a lot of agreement to push this past the November 2024 election cycle. I think there's some benefits potentially to both parties in that. Obvious benefits to the country if we push that back further in terms of getting rid of this contentious debate that really, as I mentioned before, that's not really the debate we should be having. We should be talking about whether or not to spend more or spend less. So I think that is a likely outcome. As we said, at June 1st, you're going to see a lot of concern, I think, because whether that deadline is correct or off by a week or two, that's going to really raise the temperature and the humidity across the country on this topic.

19:37I think you will start to see volatility in markets at that point, possibly even in the bond markets, which in many ways can be more disruptive or just as disruptive as volatility inside the stock market. So I think that's likely is sometime in that first week of June, they come together with an agreement. I don't have high hopes. Well, I talked about optimistically, maybe there's some framework on spending going forward. I don't actually think that'll make it in there. I think that's too contentious. I think that will go kind of into the election cycle of 24 for a main differentiator between the two parties and how they look at spending and taxes.

20:11So I think that's more likely than not. That we'll probably get some pain and see some volatility for a week or so. And then Congress will start to really feel some heat from their constituents and they will kind of come together with the president to make a deal. Well, I think that is a really thoughtful way to think about both the extremes and where we're most likely to land. There's no way of predicting this stuff. And so I would encourage any of you who get nervous from reading the headlines about the debt ceiling, not to necessarily look to your portfolio as the way to act. The first place to look is always going to be your financial plan.

20:49You can control those inputs. A thoughtfully crafted financial plan is going to take in to account the same sort of volatility and losses as we've experienced in the past. And that way you don't have to predict these things. You just plan on them. And if you are an investor, you're not investing for the next six months or 12 months. You're investing theoretically for multiple decades, regardless of your age. I completely agree, Peter. And I always think in situations like this, where it seems like we just define three potential outcomes. And I think pick whichever one you want to look at is the most likely.

21:24Then the question is, what would you do differently with your portfolio? Because at the end of the day, that's the decision you have to make. Like, look, we can't really weigh in on what's going to happen with the debt ceiling. We can talk about it. We can debate it. We can write articles about it. But we can't actually have an impact on that decision at this point in time. What we get to decide about is what we do with our investments and our portfolios and what we recommend to clients. And there we talk about what are known factors and what are unknowable factors, right? So the unknowables, Peter, you hit on it earlier, is in any of those three scenarios, we don't know exactly what markets are going to do.

22:01We kind of came up with some hypotheticals, but the reality is we don't know. You know, we have been through this several times before, and the outcome has always resulted in a deal. So in some ways, you know, what you're seeing right now in the last few weeks of the market, there's been many experts that have talked about, wow, the markets are just ignoring this. And the question is, well, maybe they are, or maybe they just truly believe that this time, hey, of course, they're going to make a deal. They always make a deal, right? So we don't know what volatility is going to happen. It could also get really bad, as we talked about.

22:32You just don't know. Here's what's known, is if you have taxable assets and you have gains in those assets, to make a move to try and duck the volatility, you're going to have to realize gains on your portfolio, right? That's a known cost. And there's transaction costs and other things that come into play. Those are known negative factors that if you're going to make a move and try and time this market, those are going to impact you long term. Those are going to be real costs. And then you have the when do I get back in question, right? Which I challenge anybody in my 26 years in this business, people can say they're comfortable getting it out at some point in time.

23:09That's actually the easier decision is when to get out. The harder decision is when to get back in because the right time, I'm doing air quotes, you can't see me, is when things are the ugliest, when things are at their worst, when all the news sounds like the world this time really is coming to an end, that's usually the best time to put the money back in. But that's not when people feel comfortable doing it because that seems like the most obvious time when you shouldn't invest. But that's when expected returns are the highest, right? So you have to think about these decisions in that framework of realizing, look, if you don't need this money in the next 30, 60, 90, hopefully the next several years, if you're in the stock market, then the best answer is to just stick to your plan.

23:53Great wisdom, as always, Chris. And these conversations are something that I will at least speak for myself. I take for granted, maybe we take them for granted that we don't air them that much, that it takes us coming all the way to Hollywood, Florida, to get on a microphone together. Our calendars don't often align that well. But for listeners who are enjoying Chris's perspective and wisdom. You are now with our director of wealth management, Rainy Verby, recording a podcast as well called The Planned Court Perspective, which I will link to in the show notes. And it's pretty easy to remember if you have to just Google Planned Court Perspectives.

24:28The other thing that I'll put in the show notes at thelongterminvestor.com is just a history of all the different crises and panics that we've lived through. And honestly, this feels so routine at this point that it almost looks silly on a timeline when you map it out with other things. And eventually things turn out OK. And a lot of that has to do with the fact that prices, stock prices over the long run, follow earnings. And the fluctuations at which they deviate from earnings is largely based on changes in valuation, which is a sentiment thing. And so I think what you were laying out there, Chris, on the different scenarios, how you'd invest the portfolio, really zooming out as opposed to in on this one instance is really important.

25:13I guess before we sign off, any last thoughts that you would like to share with the listeners? No, I just really appreciate the opportunity to come on the podcast, Peter. And I've been kind of hoping to be on there for a while, but you've had some phenomenal guests. So I can't say I should have been on earlier, but this has been great. And hopefully it doesn't take another potential crisis for me to come back on. But look, I think the last word of wisdom is if you really think about the goal of a portfolio, your wealth in general, it's hopefully to support your overall goal of happiness and feeling fulfilled in life.