It's Running Out!
Weekly Market Commentary 10-7-2013
Tim Phillips, CEO—Phillips & Company
As we discussed in last week’s blog, most government shutdowns don't come with extreme long-term consequences. Just take a look at market action for last week.
[i] Source: Google Finance
The S&P 500 was down only 0.48 percent—well within the range of possibilities for any ordinary week in the market.
On the face of things, there would appear to be not enough pain to push the political class to work for an immediate resolution, in spite of the fact that Americans confidence in the economy dropped precipitously.
With the debt ceiling fast approaching and congressional action needed to avert a default on some of our obligations, it might be worth a closer look at what's causing the gridlock. The mainstream media suggests this is simply a matter of partisan politics. Unfortunately, my political view is a little more detailed.
Why the President won't compromise?
Many polls suggest Americans overwhelmingly oppose tying a delay or repeal of Obamacare (ACA) to budget negotiations and blame Republicans for attempting this:[i]
As we have commented in the past, President Obama may have been put in "lame duck" status very early in his second term post Syria. Clearly, pressuring Republicans and winning the house in 2014 could give him the legislative make-up needed to become effective in his final two years.
Why Republicans won't compromise?
Many blame the Tea-Party members for the Republican gridlock.
The Tea-Party caucus, which is made up of 66 members of the Republican Party, has some very interesting economics driving them. I took a sampling of the 66 members, and I found that some of them have never had opponents—either in the primary or in the general election, as they come from very conservative districts. Also, on data from campaign information website Open Secrets, the average spending by a Tea Party member is about $867,000 per cycle. The average spending by all house candidates in an open seat election is about $1.5 million. This means that it costs 42% less for a Tea Party Member to run and win a congressional seat. Clearly, they might be in a position to hold out and risk very little from their constituents both from a cost and a primary challenger perspective.
What to expect?
I suspect we are going to have to experience some pain to get our political class to come to terms with the risks they are making the investor class face. While we have never defaulted on our debt, we have experienced a debt downgrade by Standard and Poor’s (a US credit rating agency). Oddly enough, after the downgrade on August 5, 2011, interest rates actually dropped from 2.58% to 1.98% one month later.[i]
We would expect rates to increase if we do default. However, there really is no other country for investors to run too with any significant size. Think about the alternatives:
- Russia: too much political instability, as well as too much concentration in energy production
- Argentina: serial defaulter
- France, United Kingdom, or other EU countries: too much uncertainty on final resolution of the European debt crisis
- Canada, Australia, or Switzerland: solid AAA-rated countries, but simply not enough public debt outstanding to satisfy investor demands
It appears we are really the only choice for safe dollars even as our country is being drained of its last penny.
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Tim Phillips, CEO – Phillips & Company
Alex Cook, Investment Analyst – Phillips & Company
[i] “HUFFPOLLSTER: Reviewing The Polling On A Government Shutdown”, Huffington Post, Sept. 30, 2013
[i] Source: Federal Reserve Economic Data