click for updated futures
Futes 9.30.137

 

 

I have some good news and some bad news.

The bad news? Well, as the futures above shows, US markets are under lots of pressure, widely blamed on the economic impact of the likely shut down of government tonight at midnight. Shutting down nearly 25% of an already fragile economy is hardly the recipe for growth and advancement.

The good news is that so far, all we have is political posturing. History suggest that nothing happens until at least 12 hours after our September 30th midnight deadline. No one gets serious about any sort of deal before noon on October 1. At that point, political pressure on the House Republicans — from constituents, from Business leaders, and from elder statesmen — will start in earnest. A few days later, it can become more intense. We see the same sort of patterns with the debt ceiling limit as well (that’s schedule to hit at midnight October 17).

As NBC’s Pete Williams have reported, we have had 17 prior government shutdowns over the past 40 years, including 21 days in 1995 (table below). So while this feels like its new and unusual, it is actually more commonplace than most of us believe.

 

shut downs

 

The odds favor a resolution in a matter of days or weeks.

 

 

See also:

• First U.S. Shutdown in 17 Years at Midnight Seen Probable (Bloomberg)

• The Odd Story of the Law That Dictates How Government Shutdowns Work (The Atlantic)

• Wall Street Uneasy in Face of Government Shutdown (Dealbook)

• Government shutdown would threaten fragile economy (Politico)

• House Republicans Push Obamacare Delay as Shutdown Nears (Bloomberg)

• Debt ceiling fandango: the key dates (FT Alphaville)

• Government Shutdown Near as House Votes to Delay Obamacare (Bloomberg)

Krugman: Rebels Without a Clue (NYT)

• ‘Political Shenanigans’ Take Center Stage, Hitting Risk Appetite (MoneyBeat)

• The Right Gets Its ’60s (NYT)

Category: Investing, Markets, Politics, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “Look Out Below, Government Shutdown Edition”

  1. [...] be the first shutdown we’ve had in 17 years, and it feels like something “new”, Big Picture‘s Barry Ritholtz writes today. It’s not. There have been 17 of them since the [...]

  2. rd says:

    The shutdown will be annoying but the debt ceiling is where the danger is.

    I am just hoping that there are still adults in the room to work this out. Unfortunately, I think it has moved past the point of Boehner being able to point at the crazy uncles wearing tin foil hats in the corner to use as a negotiating gambit. These people may not really care what could happen, even with a T-bill and bond default.

    The timing is interesting. This is three quarters of the way through the first year of Obama’s second term and more than a year from the mid-term elections. Presidents have historically wanted any bad economic and stock market stuff to happen at this point of their term instead of later in their term. I don’t think the House GOP have as much negotiating room as they think they have.

    • ilsm says:

      @rd,

      Debt ceiling if the treasury runs out of cash is the bigger issue, could require mass “terminations”.

      In shut down only civil servants, and new contracts are stopped from obligating funds. Expenditure, writing checks to pay for contractors, and supplies from prior fiscal periods are still working and billing.

      Until the treasury runs out of cash…………………………

      31 USC 1341, (a) Anti-Deficiency Act
      (1) An officer or employee of the United States Government or of the District of Columbia government may not—
      (A) make or authorize an expenditure or obligation exceeding an amount available in an appropriation or fund for the expenditure or obligation;

      I am not sure of the legal definition of expenditure, but the working definition is to pay the bill tendered by a supplier.

      So, if expenditure is paying the bills, then mass terminations would be possible.

      DoD obligated $400B in 2010 in contracts many dollars worth are still being “worked”.

      • willid3 says:

        i thought there is a constitutional amendment (14th?) that may require them to actually pay the bills. wonder which law wins? but than only applies (maybe) to the lack of a budget. not to the debt ceiling right?

  3. scone says:

    Alternatively, the shutdown happens, the debt ceiling is breached. Maybe Obama goes to the Supremes and asks permission to hold a Treasury auction. Maybe the Supremes say no.

    What was that Taleb saying, something like — “history shows that extremely unlikely events do in fact happen?”

    Let’s think the unthinkable. What if Treasuries are no longer the “risk-free asset?”

    That’s not a rhetorical question. I really don’t know. I’m not sure anyone does.

    • DeDude says:

      I think he would issue the “Trillion Dollar” platinum coin before he went to the Supremes.

    • Keith R says:

      Although I don’t think that the gov’t will default in any meaningful way, its a great question to consider. A few thoughts:

      1. The USD is currently far and away the reserve currency of choice. For it to fall then people need to devirsify into something else. But what other currencies are even close to having the security and also have significant size?
      2. Is it possible for the US gov’t to issue IOU’s like California did a couple of years ago?
      3. Would the pressure hit gov’t securities only, or would it extend to other dollar based assets?

      I asked myself at what price would I buy 10 yrs if they started selling off. I think that a 5% drop would entice me into the market even though I generally don’t want to hold them.

    • willid3 says:

      the only question would be about the 14th amendment. and not sure how the suprememes would wiggle their way out of agreeing. but then they just might. course who would have standing anyway?

  4. To look at the past for some current market guidance, the two government shutdowns in 1995-1996 had almost no impact on equity markets. The first shutdown lasted from November 13th to the 19th and the S&P’s were up 4 pts. After the temporary fix ended and the government shut down for a 2nd time from Friday December 15th 1995 to January 6th 1996, the market fell 1.5% on Monday December 18th but ended January 6th little changed from its close on December 15th. Of course the circumstances are much different today in many ways but markets should assume that a deal will come sooner rather than later because the negative consequences get too large the longer this all lasts, particularly with the debt ceiling.

    • ministerofsillywalks says:

      The data points in Pete Williams’ list prior to 1981 are a little misleading. I believe that back then, the government didn’t actually stop operating during a funding gap. The shutdowns since 1981, when AG Civiletti issued an opinion that said the govt had to actually shutdown during a shutdown, have been much shorter than they were in the 70′s on average. I would say the odds favor a resolution in days, not weeks.

      • ilsm says:

        I was in active service in 70′s and early 80′s “shut downs”. I do not remember there being any impact on daily work.

    • willid3 says:

      course it was in the midst of a huge boom back then. not exactly where we are today is it?

  5. DeDude says:

    We may get a longer shut down than usual. The Democrats need and want it to do enough damage to the Tea party that Democrats can win the house next year (a day or two will not do that, they need some real damage done). The GOP need and want it to hold onto and energize their radical base – such that they will show up at the next election.

    • willid3 says:

      might be true. but it only will impact them where they might be in a state thats isn’t totally red, or in a district that isnt’. otherwise it wont impact them at until, it slows social security payments. or military salaries. or Medicare payments. at that point it might change. which makes me think this will be a much longer shutdown than in the past. at that point the political dynamic changes.

  6. theexpertisin says:

    Who cares about a government shutdown? We expect that from time to time.

    The real news is that the Browns are in first place and the Indians are in the playoffs. That is, indeed, a once in a lifetime event.

    • cowboyinthejungle says:

      How will equities respond? Unfortunately, as you point out, there is no historical precedent from which to judge.

  7. TapeReader says:

    No worries about getting the economic data if the government shuts down, we publish better, faster, and cheaper than the government does it.

    We do this by gleaning all of the info from the Social Tape.

    The Social Tape is comprised of data generated by various online activities performed by the consumers.

    So, if the government can’t get the Jobless Claims, or Construction Spending, or Motor Vehicle Sales, or Non-Farm Payrolls, etc, out the door, you can find the reports here: http://earlyannouncement.com/.

    How cool is that ? Just another example of private industry doing the job better than the government can.

  8. 873450 says:

    Who will eat FAA flight control cutbacks this time to ensure our jet travel suffers no inconvenience?

  9. dregstudios says:

    Is the sole purpose of the Republican Party to bamboozle Obama now? In the process, they’re making every last American dance for their dinner (and healthcare.) http://dregstudiosart.blogspot.com/2012/10/bamboozling-obama.html