Think of the fight on Capitol Hill over the federal debt ceiling as kabuki theater.

Tracing its origins to the 17th century, kabuki is the stylized Japanese drama in which performers wear elaborate make-up and costumes. Actions aren’t literal but metaphorical, conveyed through singing, dancing and mime.

On Monday, every single Republican senator refused to vote in favor of raising the debt ceiling. Why should you, as an investor, care? If lawmakers remain deadlocked on raising the ceiling, the government would soon default and not be able to pay its bills. Vast swaths of the government would shut down, probably triggering a global financial crisis and stock market meltdown.

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Largely due to the Senate vote, stocks slumped Tuesday and bonds yields soared. The main U.S. indices performed as follows: the Dow Jones Industrial Average -569.38 (-1.63%); the S&P 500 -90.48 (-2.04%); the NASDAQ -423.29 (-2.83%); and the Russell 2000 -51.23 (-2.25%).

However, after the opening bell Wednesday, U.S. stocks strongly rebounded and government bond yields retreated. Equity bargain hunters came to the fore, amid optimism that maybe, just maybe, the two political parties would reach an agreement on the debt ceiling.

I’ll sort out the debt ceiling mess for you (without getting too wonky). I’ll also suggest how you can protect your portfolio under these risks.

Pro forma, no more…

The debt ceiling, aka debt limit, is the maximum amount of money that the United States can borrow cumulatively by issuing bonds, to meet its obligations. Lifting the debt limit does not initiate any new spending and simply allows the U.S. to finance existing obligations that were already approved by Congress.

Typically, the debt ceiling is lifted without much of a fuss. It’s usually a pro forma action. Under President Trump, the GOP partnered with Democrats three times to raise the debt limit.

When I worked in Congress as a staffer during the Reagan era, Democrats and Republicans raised the debt ceiling with ease. In fact, under Reagan, the debt ceiling was raised 18 times.

Congress enacted the debt ceiling in 1917. It’s a mechanism that allows the U.S. Treasury Department to borrow money for any approved spending, up to a certain limit, without first getting permission from Congress.

The ceiling was passed to appease anti-war lawmakers who were uneasy about letting the Treasury Department borrow too much money to pay for World War I. The limit exists to officially keep the power of the purse with the legislative branch. The message is: Treasury can borrow without going through the trouble of first asking Congress, but only to a certain limit, because hey, Congress is still the boss.

Is the debt ceiling a ridiculous, antiquated technicality that should be abolished? I wouldn’t blame you for thinking so. But that’s another subject, for another day.

The point here is that United States has never defaulted on its credit. Since the debt ceiling was implemented in 1917, Congress has never not raised it. Since 1960, Congress has voted 80 times to raise or suspend the debt limit.

The suspension of all previously approved government programs would create chaos of unprecedented proportions. The economic and financial shocks would be profound.

However, in our hyper-partisan era, the limit has become a political football. Do average voters understand how it works? Of course not. They only hear “debt,” a word that can serve as a blunt weapon during political campaigns.

Fiscal posturing…

Mainstream opinion is looking at the debt ceiling battle the wrong way. The key to understanding the elaborate gestures of Senate leaders on both sides of the aisle right now lies in their respective political calculations. The debt ceiling is being used as leverage to push conflicting political agendas.

The goal of the GOP nay vote is to hobble the Biden administration and create disarray that can be blamed on Democrats during the 2022 midterms. GOP leaders have publicly admitted as much.

For their part, Democratic leaders have tried to pressure Republicans into dropping their opposition to the debt ceiling bill by coupling it with legislation that contains urgently needed spending, including disaster relief for constituents back home. Democrats are motivated to get the debt ceiling battle behind them, because they want to focus on Biden’s domestic agenda, such as the $1.2 trillion infrastructure bill and $3.5 trillion social spending package (both of which most Republicans oppose).

Yellen and Powell, into the breach…

Tuesday was marked by U.S. Senate hearings attended by Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen.

In Senate testimony Tuesday, Powell reminded lawmakers that it’s crucial to raise the debt limit to avert defaults on U.S. obligations.

Yellen warned that “catastrophic” results would follow a failure to raise the ceiling, including a “financial crisis.” She pointed out that that the federal government will likely run out of cash by October 18 unless Congress raises the debt ceiling.

On Tuesday, big tech shares, which have led the stock market rebound this year, plummeted. The yield on Treasury 30-year bonds climbed. By Wednesday, rattled investors had regained their composure and stocks were back in the ascendancy.

The nervous consumer…

Meanwhile, U.S. consumer confidence dropped in September for a third consecutive month, to reach a seven-month low, as worries about COVID Delta and inflation continued to weigh on sentiment.

The Conference Board’s index fell to 109.3 in September from a revised 115.2 reading in August, according to the group’s report Tuesday (see chart).

Much depends on consumers. Without confident consumers who are willing to open their wallets, there won’t be a sustained recovery.

However, home prices spiked 19.7% in July, up from 18.7% in June, the biggest jump in more than three decades, according to the S&P CoreLogic Case-Shiller Indices released Tuesday.

What it all means for you, the investor…

Keep your eye on the hard data, not ephemeral politics. From my perspective, the wrangling over the debt ceiling is much ado about nothing. The contrarian in me says, buy on the dips.

No one gets spared if the government defaults. Everyone in Washington understands this. I suspect that Republicans and Democrats will eventually cobble together some sort of compromise. The curtain on this playacting will come down. Life will go on, until the next crisis du jour.

The kabuki performances by Sens. Chuck Schumer (D-NY) and Mitch McConnell (R-KY) make for good ratings on television, but the financial and business communities don’t want a default, so it’s unlikely to happen.

That said, you need to buckle up for more volatility. History shows that September-October tends to be a rocky time for investors, regardless of the shenanigans in Washington.

The recovery continues, but investors are getting whipsawed by undercurrents. Stick to the long-term investment strategy that you devised in calmer times. In the meantime, make sure your portfolio contains a hedge. That’s where gold comes in.

The “yellow metal” is on course for a long-term price trajectory. My preferred way to profit from increases in gold prices is through small-cap miners that can put operating leverage to work.

Our investment team has just pinpointed a gold mining stock that’s poised for exponential gains. If you act now, this small company could hand you 20 times your money. For details on this under-the-radar gold stock, click here.

John Persinos is the editorial director of Investing Daily. You can reach him at: mailbag@investingdaily.com. To subscribe to John’s video channel, follow this link.