Up the Creek Without a Battle (or this is where you end up when leaders don’t lead)
Here, on the 8th of October, 2013, we are about 200 hours from defaulting on the full faith and credit of the United States, an incredibly perilous place to be. And not only for America, but for every country that holds any significant amount of U.S. debt. And that is many, many countries around the globe, as the U.S. dollar is the world’s currency and our Treasuries are the most important paper in the world. Oh, and let’s not forget developing nations, which are too many to name here, that also rely on a stable global economy and a stable U.S. currency, lest they crash and burn with the rest of the world’s developed economies.
And if that is not enough on our political plate, we have entered Week 2 of a government shutdown, with no off-ramp in site. In fact, both of these dangerous situations are beginning to merge into a single incoherent argument—another potentially disastrous scenario as the possibility that neither situation gets settled by the doomsday deadline of October 17th (now nine days away and counting). If the Dow drops a couple thousand points before the 16th, then I predict that the House will put a Resolution on the floor that will kick the proverbial can down the road for a few weeks. But, that would only add new uncertainty and delay the crisis for a few weeks, hardly a desirable outcome given how much markets hate uncertainty.
Let’s back up and take these crises one at a time, because while both are bad, one is just terrible (the shutdown), and the other is calamitous (reneging on our bills—which means not raising the Debt Ceiling). However, if you listen to certain GOP members, some do not think a default on our debt as a crises—in fact, some seem fine with it. People like Ted Cruz and Rand Paul have gone on the record saying that a default is no big deal.
Having closely observed the financial market meltdown and the debt ceiling debate in 2011, I can tell you without equivocation that the defaulting on our debt has incredibly horrendous implications. We lost 2,000 Dow points—a 16% haircut—-when we almost went over the deadline in August of 2011. Let me put it another way: financial markets—which serve as an external scorecard for what goes on inside the beltway—basically crashed when we did not go over the deadline. And that was when there were far fewer schmucks in both chambers of congress. More on that later.
Back to the government shutdown: with one week already behind us, given the vitriol of the Beltway rhetoric, I think it is safe to assume that the shutdown will last at least one more week and join its twin disaster without settlement until October the 16th at the earliest. No one knows for sure, and I am no economist, but I feel that the financial consequences of a continued shutdown have been under-estimated. We could easily shave most of a full percentage point off of our GNP (Gross National Product) if things go south, and at the worst possible moment—when our recovery is weak and the Fed is about to decrease its monthly bond buying purchases.
However we got here, this is the key: it doesn’t matter who got us here (e.g. Cruz & company), it’s who will get us out that counts.
And pondering that outcome is what makes this an incendiary situation that burns hotter by the day. It is not only that there is no adult in the room, it is that there is no room (and no adults). As Speaker Boehner said on Sunday, “there may be a backroom somewhere, but no one is in it.” Let’s call it the empty room scenario—and that is what is causing me to lose sleep and rethink so much of what I hoped for the American economy in the 4th quarter and the early part of 2014 (remember, I see much of the world through the lens of the financial markets since I manage several of my family’s stock market portfolios–and right now, I am adding to my “shorts” every day).
Now, let’s get to the all-important leadership question. Because when you speak of huge enterprises, whether a multinational corporation or the U.S. government, everything ultimately comes down to leadership. Or more aptly, anti-leadership. The fact is there are no leaders in the House of Representatives. That’s right—none. And the most important—well, the one that at least has the title—John Boehner, is the greatest “mis-leader” (a Drucker term) of all. Why? Because he has completely lost control of both the debate and the control of his caucus. Let’s look at how this happened.
First, we recently learned that in the first week of September, Speaker Boehner shook hands on a backroom deal with his counterpart in the Senate, another mis-leader, Harry Reid, majority leader in the Senate. Boehner admitted that if Reid agreed to a $988 billion “sequester level” budget, Boehner agreed to put a clean bill (CR—Continuing Resolution) on the House floor. That means that there was a deal in place that if the Democrats backed off of their number of $1.058 trillion and gave in to the Republican number of $988 billion, there would be no default. All would be settled, even though the Democrats thought the $988 billion number too low: “We didn’t like the 988 number. We didn’t like it but we negotiated. That was our compromise,” Reid said. “The exact bill that he now refuses to let the House vote on. That was our negotiation.”
When asked about that deal, Boehner did not deny it. He said on Sunday that “his” caucus (although I do not think it is his anymore) basically changed their minds. Leaders—particularly in times of crisis—do not have the luxury of changing their minds. The cost of doing so is simply too high, as we are seeing today. Effective leadership depends on keeping one’s word and displaying “ruthless consistency.” Boehner has shown us the opposite. First he gave the keys to the House to Ted Cruz by doing something he said he wouldn’t by allowing the government to shut down, even though he said he would not permit a shutdown. But the Wall Street Journal, recently reported that the Tea Party executed this shutdown with precision. That’s right—this was a Tea Party/Ted Cruz plan all along. Many Democrats wanted to set the funding level in the continuing resolution at $1.058 trillion, rather than at the sequester level of $988 billion. But Boehner reneged, and he did it by delegating leadership to the Tea Party.
I know I have said this before, but it is the key: leadership cannot be bargained away or delegated. That is a ruinous path and Boehner walked straight into it with eyes wide open. Now he has no exit plan. At least no good ones and none that he has talked about since he refuses to put a clean CR (Continuing Resolution) on the floor.
So what happens now? Especially if you are like me—a stock market trader? First, do not count on any resolution to either the shutdown or the Debt ceiling crisis until October 16th, at the earliest, and not even then. There is only one thing that can end the stalemate sooner, and that is a disaster in the financial markets as discussed earlier. I do not see anything else that will end this stalemate without some huge external event like a stock market mini-crash.
History shows this time and time again. When a leader delegates his responsibilities, the unintended consequences are severe. Boehner has lost control of his conference and he has no one to blame but himself. If you give the keys to the car to a freshman idiot who cares only about his own political ambitions, you should not be surprised when the car ends up totaled—wrapped around some telephone pole in the middle of nowhere. That is where we might be heading unless someone blinks. And right now that seems like
more wish than a reality. So fasten your seatbelts, protect your stock portfolios, and hope that some form of leadership returns to our nation’s capital. And stay tuned by coming right back here for frequent updates.
—Jeffrey A. Krames, October 8, 2013