The 24-Billion Cruz-Controlled Wipe-Out: The Aftermath
9:52 AM EST: KRAMES UPDATE: After a weak opening due to bad earnings from such firms as IBM, we have recovered a bit. But that is not what this update is about. It is about how much worse the deal that was made last night really is. Here is the latest: as part of the bill passed at midnight, both chambers of Congress must come up with a new grand budget by January 15th, 2014. That is three months away—time enough to come up with such a deal, right? That is, until you hear the following: even though there are two-and-a-half months left in the year, Congress will be in session for only 18 days in what is left of 2013. That’s right. While the rest of us work at least five days a week to make ends meet, Congress will work—on average—about one day a week for the remainder of the year. I know we have the best system of government and democracy in the world, but we are at an all-time low in the way we manage our government. This is bound to effect the markets in the weeks and months ahead.
Well, here we are, about six hours after the House, Senate and President ended the government shutdown after 16 painful days while averting economic disaster. This was a self-inflicted unmitigated disaster that did great harm to the Republican brand, and much, much worse, made the United States—and it currency—a less safer bet in the eyes of the rest of the word (and remember, China and Japan hold about 45 percent of U.S debt).
First, a word about the timing of the vote. This thing came down to the wire. After the Senate took up the vote in the mid-evening hours, it would take several additional hours before the House voted on the bill. At 10:21 pm, with less than 100 minutes to go before default, the House had their vote on the bill. You cannot cut it closer than that and that is why we are seen as a superpower that is governed like a banana republic. As a result, I would be shocked if Fitch elected not to downgrade The United States in similar fashion to the Standard & Poor’s downgrade of 2011.
Next, the numbers: according to Standard & Poor’s, the 16 day-shutdown cost our economy dearly: $24 billion and six-tenths of growth (or 20% of our forecasted GNP growth—a significant number). That is a chunk of change and a growth haircut that we could ill-afford at this very delicate time in our slow-moving recovery. We have also lost at least tens of thousands of jobs as a result of all of this tumult, and that number will surely increase when the government provides a concrete tally.
If that is not bad enough, both business and consumer confidence is down, and the entire woeful affair only kicked the can down the road for a couple of months (I have come to hate the phrase “kick the can.”). We will be right back here in January, for the government shutdown, and early February, for the Debt Ceiling.
For those of you who read me, you know how I feel about the junior senator of Texas, Ted Cruz. There is little doubt that it was this hard-right, self-appointed emperor of the Tea Party that sparked the government shutdown, with much help from his far-right caucus and powerful organizations like the Heritage Foundation. It is rare indeed for one member of congress to wield such power, especially one this fanatical, but there is no escaping the truth. And don’t take my word for it. Fellow members of the Republican Party, moderates like Representative Peter King, among many others, blamed Cruz from the start. Former presidential contender, Senator John McCain, called the Cruz crusade “the wrong ground, the wrong premise and the wrong fight to have.”
Despite the fact that about 20% of the country considers Cruz a tireless crusader, I believe he represents the worst of our government and our country. A demagogue who blames the rest of the world for the deeds that he himself set in motion. And, unfortunately for Wall Street, K Street, and Main Street, he is not going away anytime soon (although his fellow Republicans have threatened him privately to cool it lest he reap the wrath of smart and powerful Republicans like Mitch McConnell—who has no love lost for Cruz, to say the least). Perhaps worst of all, some credible pundits are calling Cruz the de-facto leader of the Republican party—a frightening thought. But who else is the leader of the GOP? That leadership vacuum is the Republican’s party greatest challenge in governing in a functional manner and worse for them, a real problem for the 2014 mid-terms and more important the 2016 presidential election. Can you imagine if Cruz actually gets the GOP nomination? He would be crushed in the general election, which is why it is so unlikely that he will be a contender in ’16.
What Wall Street is Focused on Today
Yesterday, Wall Street was focused like a laser on just getting the deal done. Today, comes the aftermath—the hangover. Like some fraternity beer-bash that trashed a dorm room while everyone got drunk and broke the furniture, Wall Street is waking up to an unruly mess that is the aftermath of the third longest government shutdown in U.S. history. The aforementioned numbers are sobering and likely to affect fourth quarter earnings and bleed into the first quarter of 2014.
That is why I believe that many Wall Street insiders will be focused on the implications of the 16-day government shutdown. Many fear that this latest episode will have a profound effect on our country and economy going forward. One noted analyst, Greg Vallieire, stated it well when he said “We have crisis after crisis after crisis and it has a corrosive impact on the economy…If you’re in a business, how do you make plans in this environment?
Major chief executives agree with that thinking. Here is Laurence Fink, the CEO of the behemoth asset firm BlackRock: “Most CEOs I speak to in the United States say they’re seeing a slowdown in business because of this…I was on a conference call with many of them, and I heard across the board, a slowdown from the American consumer because of this [the Washington dysfunction] narrative, so it’s having an impact on our economy already – and it’s going to have an impact on job creation at a time when we need more job creation.”
What else will Wall Street will be watching today? We we will get a jobs number today. That could easily move markets, but I am expecting another weak number due to the protracted shutdown. Perhaps most important, Wall Street is watching earnings and it is not liking what it is seeing. IBM is down well over 6 percent pre-market because of its sixth revenue miss in as many quarters. And eBay, a favorite company of mine but no longer a favorite stock, is down 5 percent pre-market, predicting a weak holiday online season. And just in: Goldman Sachs also disappointed and is down 4 percent pre-market. These bell-weather earnings reports bodes poorly for the rest of the quarter.
So, to sum up, I expect a tumultuous day and a possible substantial give-back of some of the gains of yesterday de to the hangover of the shutdown and poor earnings.
Please be sure to check back here throughout the day for frequent updates.
—Jeffrey A. Krames, October 17th, 6:30 AM CST