Just touched down in Brazil and I am slightly surprised to see the calm with which the market deals with the US government shut-down. True in the short-term economic impact its damage is limited, but how about the politicians and their inability to reconcile themselves with their voters?
A stunning 72 pc of Americans oppose the government shut-down, CNN reports that 46 pc will blame the shut down on the Republicans and 36 pc on Obama. Meanwhile 800.000 public employees will be furlonged and an additional 1 million workers will go without pay.
The damage done is hard to quantify as its dependent on how long the shut down is in place, but here is a few estimates:
IHS says one week will cost 0.2 pc of GDP. 21 days will ocst 0.9-1,4 pc of GDP, meanwhile Bank of America Merill says two weeks equate to 0.5 pc and all October will cost 2 pc of GDP. Basically the price for from 0,2 pc to 2,0 pc which is a lot in an economy which by Wall Street prior to the shut down was on track for less than 1.6 pc growth YoY after 2.5 pc in 2012.
It has been 17 years since the last shut down during the Clinton years and as the bulls like to point out the US economy grew stronger not worse after the shut down, but more importantly it was preceded by a massive sweep by Newt Gringrich and the Republican party using the the Contract for America to unseat the Democrats - Wikipedia
This led to the President Clinton eating something of a humble pie on the budget having to promise to balance the budget over seven years.
The early 1995 shut down was from November 13th to November 19th. Clinton vetoed a continuing resolution passed by the Republican controlled Congress. A deal was reached allowing for 75 pc funding for four weeks, and Clinton agreed to a seven year timetable for a balanced budget.
This was followed by second shut down from December 16th, 1995 to January 6th 1996 where subsequently the Republicans demanded Clinto propose a budget with a seven year-year time table using the Congressional Budget Office numbers, rather than Clinton's Office of Management and Budget. However Clinton refused. Eventually, Congress and Clinton agreed to pass a compromise budget.
The US economy went on to perform and the Congress at that time worked to keep each other in line, rather than to ruin any attempts to make politics. Much have changed since and to be honest having lived in the US and as someone who have to deal with politicians on a regular basis I am losing faith in this breed of humans calling themselves politicians. They stopped representing their voters long time ago, now is its all Facebook updates with empty statements and pointed fingers.
The first practical impact on the market will be a lack of Non-farm payroll next Friday and then the October 17th debt ceiling limit expiring. The government shut down could merely be an appetizer to the debt ceiling debate but to me, still, the most important thing will be that FOMC will not be able to have any data available to them before we go into 2014 due to distortion, late fillings, refilling and the like.
Meanwhile our expected trend change in housing and employment is about to start as we enter Q4 today. The increase in noise will make the consumer and corporations more defensive and unlike 1995/96 the US economy is running on empty.
Strategy:
Remain long core fixed income. 2.25% yield(10 Year US government bonds) still likely despite the odd talk of 'default' in the US after October 17th .
The price tag which politicians keeps missing remains: No real reforms and a potential growth outlook which at best is now at 1.2% for the full year in the US - if that's 'recovery' then I need my school money back.
Steen jakobsen
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