As this Sunday draft is being edited for final publication, the government shutdown of the United States has been averted with a stopgap bill — but there are already costs incurred with a negative impact on interest rates reflected in CDS pricing.
Until late Saturday, it was projected to be shutdown weekend. The outcome from today's continuing resolution kicks the can down the road until right before the Thanksgiving congressional recess. We all pay the price. Political dysfunction prevails.
A retired judge and former Republican who is disgusted with the pointless shutdown brinkmanship politics sent me the following link on Wednesday. Note that the article is critical of both Republicans and Democrats, which is why I am including the link . An excerpt follows.
“House Republicans Are Hurtling Toward the Most Pointless Shutdown Ever", https://theintercept.com/2023/09/26/government-shutdown-house-republicans/ (There is no paywall to read it, and joining is free.)
In a rather striking split screen today, Joe Biden became the first president ever to walk a union picket line, grabbing a bullhorn and using the word “we” to rally striking autoworkers. His Federal Trade Commission teamed with 17 attorneys general to sue Amazon for unfair competition (which was fun to see Jeff Bezos’s Washington Post report). And the FCC, finally under the control of Democratic commissioners, announced it would be moving to restore net neutrality rules undone by Trump.
Over on the Republican side, the House GOP continued barreling toward a government shutdown over … what exactly? “Madam Speaker, forgive me, but what the hell is going on here?” wondered Democratic Rep. Jim McGovern from the House floor this evening. And Trump will be skipping Wednesday’s Republican debate to speak at a non-union auto parts company that has nothing to do with the UAW strikes against the Big Three. It’s a tale of two parties taking unusually divergent governance paths.
It’s not all rosy for Democrats, of course. The dam broke for New Jersey Sen. Bob Menendez, with more than 20 of his colleagues and counting calling for him to resign after being indicted for over-the-top levels of corruption — while interestingly not a single Republican senator has done so. He’s holding out for one simple reason: His number one goal at this point is not re-election, it’s staying out of prison. One thing he can offer prosecutors is resigning. The Justice Department, when it targets politicians, often offers reduced sentences or no prison time in exchange for stepping down. Resigning now would be giving up that card for nothing.
I’ve written about how the dysfunctional politics in America are raising market-based interest rates even as the Federal Reserve is on “hold.” I’ve cited the widening spread between the 30-year federal agency yield versus the 30-year US Treasury yield. I’ve cited how the credit insurance cost on the United States (10-year credit default swap denominated in euro) is now as high as it was at the peak of the debt ceiling fight last May. Also note that the 5-year US dollar-based credit default swap has doubled from 20 basis points to 40 basis points since January 1. I’ve noted the beginning of widening credit spreads on various types of financing. These are market-based prices. These are my not my assertions or opinions. Anyone who thinks that political dysfunction doesn’t have a cost is ignoring the facts.
Do the miscreant politicians, who are obstructionists, care a thing about the citizens and what this madness is doing to the nation? We suspect they don’t, since this game of shutdown has always been a lose-lose proposition for citizens; it is a power politics fight among the few in Washington who are insulated from the damage that they inflict. The Senators and House Members know it. Meanwhile, investors ask: Will it take a “TARP moment” stock market selloff to change things? Maybe, it will.
So why do they do it? Why do we allow a small group of political financial terrorists to drive the financial and economic policy of the UNITED STATES? Why do we do that, whether the obstructionism is coming from the extreme right-wing radical House Freedom Caucus or the extreme left-wing radical Congressional Progressive Caucus?
Why? Most Americans are “in between” the extreme radical right and the extreme radical left. So, why? I have no answer except to suggest that we have become inured to this behavior and go on about our daily lives without paying much attention to Washington.
Until it impacts us personally and then we stop the apathy and wake up!
We will leave the political philosophy issues for others to debate. In the financial and investment markets, market agents and investors don’t like this behavior. They don’t like it from Democrats, and they don’t like it from Republicans. My most frequent responses from readers and from clients when we discuss the issue are “The system is broken” or “We have to throw them all out and start over” or “They only want to get re-elected and don’t give a damn about us.”
The two front-runners for the presidential election next year are an octogenarian current president who is polling low supporting numbers and an indicted (four times) former president who is getting nearer to 80 every day and who skips the debates of his own political party while a whole bunch of wannabee candidates fight over the undecided caucus votes in a Republican primary campaign in Iowa.
Want to do some research and learn? Wait until the Iowa caucuses are over, and then count the amount of money each candidate spent for each vote. Then ask yourself what you would do with that sum if you could apply it in some other venue.
Let’s get to the actual consequences of a shutdown event. Watch citizen anger if, as, and when a shutdown begins to bite personally — when our movement through airports slows to a crawl, or a new Medicare card is delayed, or we cannot get any of the other services we seek from our federal government, and the reason we can’t get them is the shutdown political fight, which most agree is “just plain stupid.” Meanwhile, some federal employees don’t get paid, last time including the Coast Guard and others who serve under the Department of Homeland Security. Would anybody go for a boat ride in Sarasota Bay?
For investors, this shutdown scenario is increasingly difficult.
What else happens during a shutdown? We see the interest rates rising. We see the stock market correcting. We see pressures in the commercial real estate sector. We see questions about some banks and warnings of more trouble in the banking system. And we see our national government seeming to fail and fail and fail again.
During shutdowns, the United States Congress ignores the facts and the interests of the many (most of us) as some of its members play power politics. Example: M. T. Greene (R-Georgia) introduces a motion to cut the pay of the Secretary of Defense to a $1 a year. Really? Thanks, Marge, for your demonstrated leadership on behalf of our nation. As Karl Rove wrote in the Wall St. Journal (September 27), this handful of miscreants (my word, not his) has been named the “Chaos Caucus.”
We have a cash reserve in the US Equity ETF portfolio. We are taking advantage of opportunities in certain sectors of the fixed-income markets. This week we were able to purchase longer-term tax-free bonds at yields over 5%. They were highly rated at AA. The taxable equivalent yields are now approaching or exceeding 8%, depending on what state you reside in.
Congress barely averted a shutdown this weekend.
I wish all readers a Happy Sunday morning.
I hope the TSA got the memo and is still operating as I head for my Sunday morning flight.
David R. Kotok
Co-Founder & Chief Investment Officer
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