Why this Goverment Shutdown Will Wreak Havoc

Last Sunday—the 22nd of September—I predicted that if no action was taken by Congress to avert a possible shutdown by Friday (the 27th), the stock market would shed 300-600 points last week. That prediction was pretty much spot on—but much closer to the low end of my prognostication.

I figured that if no action was taken by Friday, the do-less-than-nothing 113th Congress would not get their act together and financial markets would sniff disaster in the air and react accordingly. I must confess that I thought the market sell-off would be far more disastrous. But that was not to be. In fact, none of the major banks or institutional money managers panicked and we only lost about 70 Dow points on Friday. I still wonder why that I was in the minority about the prospects of a black Monday.

Now fast forward about 30 hours: In the early morning hours of Sunday, September 29th, the divided-amongst-themselves House voted to add a rider to the funding bill that basically said “delay Obamacare or we will shut down the government.” Never mind that both the Senate Majority Leader, Nevada Democrat Harry Reid, and the President both promised to “veto” ANY BILL THAT DELAYED OBAMACARE. Yes, we are back to insanity land as I described it in the blog posting below.

The “Greatest Gall Award” of the weekend goes to California House Representative Darrell Issa, who, when asked by a reporter “…When this fails…”—Issa went a bit unhinged on a very competent reporter:

“How dare you assume failure. How dare you! How dare you! How dare you?!

How dare he? Once again, we have another member of this confused Congress unable or unwilling to face reality. I can only tell Representative Issa with respect that the reporter who asked the question isn’t the only one to “dare” assume failure. By the time he jumped down that reporter’s throat, every reputable news organization and any CSPAN watcher knew it was over. Failure was inevitable. So, Congressman Issa, before you take your anger out on a reporter merely doing his job, I ask you to take a deep breath and look in the mirror.

Now, lastly, why do I think this shutdown will have such a disastrous outcome? First, a bit of history.

In the last four decades, there have been 17 shutdown of the United States government, with six in the 1970s, each lasting longer than eight days. However, the longest shutdown happened under a Democratic president’s watch, under Bill Clinton in 1995-1996, which lasted precisely three weeks. The government said that shutdown cost the American taxpayers more than one billion dollars.

This shutdown may not last that long, but any shutdown of more than a couple of days will wreak havoc in our nation and reverberate around the world. Why? The capital markets have never been more inter-connected or more global in behavior. That means that the effects of this shutdown will likely begin in Japan tonight [and the rest of Asia], which are the first major markets to open tonight, Sunday, at 8 pm Eastern Standard Time. That will be followed by Europe and then the U.S. Monday morning. This means financial markets around the globe will almost assuredly lose tens of billions of dollars of value, with the worst effects to be felt here, in the U.S. This will mean that people’s IRA’s will suffer, as well of course any other stock market accounts holding people’s savings.

The stock market is only a small part of the ill effects of a shutdown. Tens of millions of government workers will be “furloughed,” and may or may not ever recover that pay. At a time in which our recovery has been weak, this is absolutely the worst thing that could happen now. wait—I take that back.

The worst thing that could happen comes in about 18 days if the Congress and the president fail to pass a bill to pay our debt by raising our debt limit. The last time we came even “near that cliff” was in August of 2011.

The effect?

The stock market dropped well over 600 points in a single day (and that followed a 500-point down day a few days earlier). In all, the stock market surrendered a whopping 15 percent in two weeks, the worst performance since the fall of the House of Lehman which sparked the financial crisis of 2008-2009. And remember, that time we averted a disaster because the Congress voted to pay our bills, albeit in sloppy fashion in the final moments. But even though we averted that cliff, Standard & Poor’s still downgraded our credit rating, which was what really sparked the disaster in the financial markets.

So we watch and wait. Full disclosure: I have a number of large short positions in the stock market because nothing that has happened this weekend came as a surprise to me. However, it is important to note that there are many, many people smarter than me that feel that I am making a tempest out of a teapot. Time will tell. But with this Congress—and a president who won’t mind a shutdown all that much, since it means that Republicans will likely lose ground in the 2014 mid-terms if any shutdown tales place—I bet my money on red. That is, we will see a great deal of red before the bouncing ball falls back into the black.

Stay tuned for frequent updates!!
—Jeffrey A. Krames, September 29, 7:30 am CST

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