At the annual Jackson Hole Federal Reserve symposium, Fed governor Jerome Powell Warns About Failure to Raise Debt Ceiling. “Economic shock from U.S. being unable to pay its bills is not something we need right now.”
Further adding to the unwarranted drama, New York Times writer Gretchen Morgenson says Shut Down the Government, and This Time, Investors Will Care.
“If we have to close down our government, we’re building that wall.”
So proclaimed President Trump at a rally in Arizona on Tuesday, raising the specter of a federal government shutdown if Congress fails to provide the money to put up a wall between Mexico and the United States.
In recent years, government shutdowns have become so common that markets have either embraced them or shrugged them off. But as investors absorb the possibility of a closure this fall, market tremors are likely to intensify, experts say. The past will not necessarily be prologue this time around.
That’s the view of Isaac Boltansky, director of policy research at Compass Point Research & Trading in Washington.
Early on in shutdown history, investors reacted very negatively. Closures in 1976 and 1977 coincided with 3 percent declines in the S. & P. 500.
Mr. Boltansky looked back at the stock market’s performance during all 18 government shutdowns, starting in 1976. He found that the Standard & Poor’s 500-stock index averaged just a 0.6 percent loss over the course of those closures.
As investors grew more accustomed to shutdowns, they seemed to become more blasé about them. During the mid-1990s and the 2013 closure, for instance, stocks actually rose. They gained 3.1 percent during the 2013 stoppage.
The ripple effects resulting from a government shutdown are likely to be significant. Investors who have grown used to stock prices that only go up might want to strap themselves in for a bumpy ride.
Shutdown Q & A
Morgenson asks “How can the Federal Reserve Board begin to normalize monetary policy, as it has said it would, amid a government closure?”
Curiously, it would seem to be automatic. The Fed would stop reinvesting interest paid if it didn’t get paid interest. Even if it did get paid interest, why would it have to reinvest the interest as it does now? And by not reinvesting interest, the Fed’s balance sheet would shrink.
Boltansky said that if there is a shutdown, “It will confirm one of the market’s fears that the Republicans are not a political party but a government coalition made up of leadership loyalists, conservatives, and moderates.”
Isn’t that obvious already?
Nonetheless, Boltansky added: “If you have that dynamic, how can you get anything done legislatively?”
Isn’t the inability to get anything done also obvious?
What does this have to do with the stock market anyway? It can go up or down for any reason at any time. Sometimes the market rises in shutdowns and sometimes it doesn’t, and the reasons may not be related to the shutdown at all.
The final kicker in this drama-added scenario is this simple fact: No one believes Trump’s bluffs anymore.
Will Trump really stop government if he does not get the wall? If so, what happened to his promise to get Mexico to pay for it?
The last time a shutdown happened, Republicans took all the blame and nothing good came from it. They will not want to repeat that fiasco.
Trump says he wants a clean bill increasing the debt ceiling with no spending reforms.
What ever happened to the idea we need to shrink the deficit and balance the budget? It’s a permanent case of next year, next year, next year.
Finally, please note that Trump does not really want a “clean bill”. Rather, Trump wants the bill to include funding for a wall that he says Mexico will pay for. That lie is now exposed.
The immigration problem isn’t due to lack of a wall. The problem stems from giving free money, free food, free healthcare, and free education to illegals who get in.
Why don’t Republicans who are in control of both houses of Congress and the presidency do something about that?!
Will Investors Care?
Perhaps there is a minor delay in passing a ceiling. But the odds of a prolonged shutdown are close to zero. Someone always blinks. The Republicans have bitter recollections from their last attempt.
With that, let’s return to Morgenson’s opening gambit “This Time, Investors Will Care”.
Will they? How will we even know?
The stock market is massively overvalued and could collapse as much as 40% for any reason or none at all based on simple valuation.
- Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble
- Reader Asks: Can the Bubbles Last Forever?
- Tracking the Amazing Junk Bond Bubbles in the US and Europe
- Median Price-to-Revenue Ratio Higher in All Deciles vs 2007, 90% vs Dot-Com Bubble: THE Choice
This fake drama over the debt ceiling isn’t worth popping a bowl of corn to watch. There may be stock market gyrations but debt ceiling drama will not be the reason.
Mike “Mish” Shedlock