The War in Washington Rages On—Does it Matter?

Deep Divide Lingers After Impasse Ends
“Pessimism Greets Lawmakers as They Start Negotiations on Broad Budget Deal”

Wall Street Journal, December 18, 2013

I will do anything to stop the train wreck of Obamacare.”
—Senator Ted Cruz (Texas-R)

We Won’t Back Down on ObamaCare
—Jim Demint, President, Heritage Foundation, in th Wall Street Journal, October, 18, 2013

As we end this eventful week, I think it useful to spend a few minutes to look at what lessons were gleaned from the $24 billion government shutdown and debt ceiling showdown—and what those lessons tell us about what may happen in the months ahead (when a new bi-partisan budget is due—and the dreaded Debt Ceiling deadline returns once more).

From the view on Wall Street, much of this comes down to three critical questions:

1. Can the government be shut down again?
2. Can the debt ceiling threaten the full faith and credit of the U.S. again?
2. How likely is it that #1 and #2 [above] will actually happen?

As you can easily discern from the quotes above, the far right wing of the Republican party is not going away anytime soon. You would think that waging a fight that they could not win, while badly tarnishing the Republican brand would be enough to deter another budget and debt ceiling stand-off, but you would be wrong. The Tea Party is so fiercely determined to take down Obamacare—and Obama—they will stop at nothing to achieve their goals. In fact, the rhetoric and pronouncements coming from the Tea Party leadership has only been ratcheted up in the days after the government shutdown ended.

There is no doubt that their is a raging civil war in the Republican party, the likes of which we have not seen in decades.

In today’s Wall Street Journal, former governor of South Carolina and current President of the conservative think-tank Heritage Foundation, Jim DeMint, published an Op-Ed that embodies the current thinking of the Tea Party. The piece is entitled:

We Won’t Back Down on ObamaCare
Fighting a law that is unfair, unworkable and unaffordable is reasonable and necessary.”

Now that the government shutdown has ended…it’s worth explaining why my organization, the Heritage Foundation, and other conservatives chose this moment to fight—and why we will continue to fight. The reason is simple: to protect the American people from the harmful effects of this law.”

Other publications have also come out to show just how determined the far-right is to go back into battle. In a just-off-the-presses Bloomberg/BusinessWeek cover story, the magazine features a creepy-looking, distorted-devilish- depiction of Ted Cruz. Here is an excerpt of that story:

Say this for Tea Party Republicans: They don’t back down. No apologies for triggering a partial shutdown of the federal government, then refusing to raise the debt ceiling without concessions. Condemnation rains down on them from the White House, from foreign capitals, from public opinion polls, but the Tea Party rages on.”

We even heard from the intellect of former Vice-Presidential candidate Sarah Palin: “
Those that can’t stand strong to defend our Republic…heck yeah, they have to be ‘Primaried’ or we’re going down

Yes, the Tea Party even turned “Primary” into a verb—a very dangerous one at that.
To “Primary” someone means that if any Republican who is up for re-election won’t play Tea Party-ball, then the far right will find a candidate in their district more in keeping with the fractious Cruz-like leanings. And we are seeing that in several districts already.

What does this far right war mean for the financial markets in the near-term?

Absolutely nothing.

Nothing? Why nothing?

Allow me a quick story to explain that answer: in 2003, I had the privilege of sitting in the living room of Dr. Peter Drucker, who since passed away. Drucker is regarded as the father of modern management and the grandfather of the modern day business book. He is also credited with coming up with such phrases as “management strategy” and “post-capital society.”

Dr. Drucker, then 93 years of age, had invited me to him home in Claremont, California, to interview him for a book I was writing (Inside Drucker’s Brain). In that interview, he told me something that will stay with me forever:

I never met a CEO who could manage more than one priority at a time.”

While Dr. Drucker was describing the attention span of leaders, he might as well have been talking about the attention span of Wall Street and its participants. On Wednesday of this week, for example, all of Wall Street was focused on one thing: getting the budget deal passed by midnight. When it appeared that would happen the stock market shot up 200 points (despite some bad economic numbers that came out that day).

Today, Wall Street is focused on one thing: earnings. At least now they are focused on the right things, for nothing is as important as earnings. After weak reports from such companies as IBM and eBay, we now have much better earnings numbers from Google and GE. It is those reports that will likely determine the price action of today’s market. However, Wall Street ceases to surprise me: yesterday, for example, NASDAQ had a very strong day in spite of IBM’s weak sales numbers and eBay’s poor outlook.

Does this mean that the Tea Party’s dogged determination to dominate the headlines does not matter? Not at all. They do matter, and I feel that we will be right back in the soup in about two months. But they don’t matter today, or next week. They only matter when Wall Street’s attention is once again focused on them.

However, there is one exception that could alter the calculus: if that Fitch downgrade comes over the weekend or next week, which is very possible, that will underscore the severity of the problem that we know as “the new normal,”—Washington dysfunction. Then all bets are off as earnings will take a back seat to the realization that the greatest threat to Wall Street and our economy is the fact that the greatest country in the world can no longer govern itself with any more assuredness of a banana Republic.
—-Jeffrey A. Krames, October 18, 2013


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