The Week Ahead: What Will The Government Shutdown Cost?

thenews 2013.09.29 15:09

The most important issue facing the US markets and economy is the pending government shutdown. If this expands into a debt default, the implications reach worldwide. As I accurately forecast last week:

"Despite a busy economic calendar this week will focus on Washington and the inability to compromise on important decisions. There are two key questions:

Can a government shutdown be avoided?

Will the U.S. default on its debt, by failing to raise the debt ceiling?"

The background and discussion still reads well, so I urge readers to check that out as a refresher.

An Important Distinction about Politics

Regular readers know that I strongly recommend separating your political viewpoints from your investing. You should join me in being politically agnostic—willing to invest successfully no matter who is in power.

It is fine to have an opinion about ObamaCare, about debt, about European leadership, or about the Fed. Feel free to express your viewpoints in personal discussions or in the ballot box. Stop there. Confusing what you hope will happen with what probably will happen is the fast track to investment losses!

When I discuss policy issues, I am helping you to predict what will probably happen and also the investment consequences. I have been extremely accurate on every important policy decision for many years – Europe, 2011 debt ceiling, fiscal cliff, etc. – often in disagreement with the majority of pundits. I have never expressed personal preferences, but instead emphasize how to profit from likely outcomes. I regularly cite sources covering a wide political spectrum. Discerning readers might note that I find the viewpoints of extremists of all types to be market-unfriendly. Mainstream thought, from whichever party, is better for investments, whatever your personal views.

The implication for investors is that gridlock leading to a default on U.S. debt is bad. This is an investment conclusion, not a vote on ObamaCare.

Current Situation

At the time I am writing this, a government shutdown seems to be unavoidable. Some key points:

Polls show that both parties will be blamed for a shutdown. This encourages brinksmanship.
Obama has little incentive to negotiate. See Ezra Klein's analysis of the "Putin" argument.
The GOP is ready to rumble! Veteran Hill observer Stan Collender writes that their "lesson" from the Clinton-era shutdown is that they were not aggressive enough.

What does this mean for investors?

A shutdown might cut GDP by as much as 1.4%.
Here are some specific effects.

The two themes – the shutdown and the debt ceiling -- have become linked. Originally Speaker Boehner wanted to avoid a potential shutdown, preferring to use the debt ceiling as leverage. Under pressure from the Tea Party wing of the party, the House passed a continuing resolution that eliminated funding for ObamaCare. The Senate stripped the ObamaCare portions from the bill and sent it back. The House (at least at the time of writing) is standing firm and the Senate is in recess until Monday afternoon. There is no chance for agreement on the House bill.

What will this mean for stocks? I have some thoughts which I'll report in the conclusion. First, let us do our regular update of last week's news and data.