Monday, 7 October 2013

Shutdown shenanigans!

As we roll into the 7th day of the US government “shutdown”, nobody seems particularly perturbed. Here are some potential reasons why:

1) With all due respect to those individuals that are currently going unpaid as a result of the shutdown, the “shutdown” is really more of a media show than an economic event. Sure American shrimps maybe going uninspected as a result of the shutdown but the fact is ~80% of government cannot be shut down.

2) The S&P 500 is up +19% year to date. This has caused a change in sentiment that only a +19% rally in equities can cause. The glass is now half full and people want to buy any shutdown-related dip.

3) The “real issue” is seen as the brewing debt ceiling debate and the prospect of a US government default. This is also the reason S&P futures are down 1% currently...and maybe we NEED right now is a good old-fashion shakedown in the equity market to scare the politicians into some sort of agreement.

Sadly as of this morning, brinksmanship regarding the debt ceiling debate shows no sign of abating and with only 10 days left to secure an agreement, people are understandably starting to get nervous. The FT ran this story over the weekend. Lines like “Mr Boehner, Speaker of the House of Representatives, said the Republican majority would not pass bills to fund the government or increase the debt ceiling unless the Obama administration was willing to make concessions on healthcare and other issues” does not inspire confidence in a speedy resolution.

I don’t pretend to be an expert on US politics but from what I have read it seems as though:

1) There are quite possibly enough moderate Republicans in the House whose votes, which if combined with Democrat votes, could see a “clean” continuing resolution bill pass.

2) The reason Boehner has not brought such a bill to be voted on in the House is due to the so-called “Hastert Rule”. The unwritten rule states that a Speaker should not put up for vote any bill that does not have the support of a majority of his rank-and-file members.

If the above is true, I think Mr Boehner’s reputation and legacy could be seriously compromised if an agreement on the debt ceiling is not reached. The political fallout of a debt-ceiling breach will be truly horrendous for everyone involved in US politics however it seems to me as though Boehner and the Republicans will have the greater share of fingers pointed at them.

Certainly volatility remains much lower now than during the previous debt ceiling fiasco in 2011. This possibly reflects the fact that everyone believes the asshats politicians will get their act together just in time. Some argue the market is overly sanguine and put protection should be purchased given the low volatility and high event risk. Personally I think the backdrop is different now to then. Sentiment has changed (see point 2 above). Not only that, in 2011 the world was also contending with an earthquake, tsunami and potential nuclear disaster in Japan at around the same time.

There is a famous quote attributed to Winston Churchill, that Americans can always be counted on to do the right thing…after they have exhausted all other possibilities. Let’s hope this holds true, otherwise 17th October may end up getting renamed Zerohedge Day*! 

Further reading on this topic:

America Flirts With Self Destruction (Martin Wolf)

Obama Doesn't Rule Out Using 14th Amendment To Raise The Debt Limit (Yahoo News)

John Boehner’s room for manoeuvre limited by unofficial principle (FT)


*For the uninitiated, Zerohedge is a prominent financial blog that has consistently made apocalyptic predictions regarding the global financial system since the financial crisis.