In the last few weeks, as we have all witnessed the absolute meltdown of the Obamacare Website, there has been much talk—mostly by President Obama—about the “best and the brightest” he has brought in to fix the problem. That term, “best and brightest” was made part of the leadership vernacular not by Obama, but by another president, JFK.
It was Kennedy’s “whiz kids”—the best of academia and industry—who became associated with the term “the best and the brightest.” JFK of course had his brother, Bobby Kennedy, as his attorney general. There was also Ted Sorenson, Kennedy’s special counsel, adviser, and legendary speechwriter, and Arthur Schlesinger, Jr., the Pulitzer Prize Winner who served as special assistant and “court historian” to JFK, among many others.
However, all of this talk about the best and brightest by Obama, did get me thinking about JFK (precisely one month away from the 50th anniversary of his assassination). I am afraid Obama is no JFK, but truth be told, JFK was not quite the legendary JFK we have built him up to be. He was beloved and charismatic, but intellectuals like Peter Drucker asserted that his legislative feats were not quite as impressive as he was.
Before I wax on too long, this piece is about the 44th president, not the 35th.
When Obama trod out the words “best and brightest,” I immediately thought of Kennedy and instantly knew why things have gone so wrong for Obama since he was sworn in for his second term. It got me to think about Obama’s presidency in a much broader sense than a failed healthcare Website or a misstep or two.
It hit me. Like a ton of bricks. The answer was so obvious.
In his first term, Obama took great pains to bring on the smartest, most capable people he could find. He even appointed his foes, if he felt that person was the strongest candidate for the job. He hired the best, and not only in his cabinet, but in other key posts as well. I thought back to the people he surrounded himself his first time around as president: there were outstanding leaders like Secretary of State Hillary Clinton. But as important, he made sure to have the best political advisors of his day. There was the two Davids—Plouffe and Axelrod—two of the greatest political minds of his day (Plouffe was so good that he was later paid $1.5 million+ for a political non-fiction book).
The “Davids” not only helped Obama to win elections, they advised him on a great number of things. Obama also had the feisty, but imminently clever and ruthless Rahm Emanuel as his chief of staff for most of his first term as well.
That really got me wondering about one recent specific event in particular. When Obama was on the verge of launching missile attacks against Syria [for using chemical weapons on a massive scale], he took a 45-minute walk with his “new” chief of staff Denis McDonough. According to the official White House Website, Obama said that “Denis has played a key role in every major national security decision of my presidency…from ending the war in Iraq to winding down the war in Afghanistan.”
Could it be that it was the same man that helped Obama to end two wars that talked Obama into calling off those strikes at the last minute? I wonder about what would have happened if that walk was taken with ruthless Rahm Emanuel instead. Whether it was good policy or not, it was Obama’s own “red line” that was crossed and his inaction diminished the United States in the eyes of the rest of the world. The buck stops with him, not his chief of staff. But advisors can play huge roles in the success—or lack thereof—of any leader.
When Obama failed to take action in Syria, after declaring that red line, He looked weak and indecisive. And that was not only the view from foreign capitals, it was the view from inside our borders as well. And for any leader, especially the one at the helm of the free world, there is great danger with looking weak and indecisive.
It invites miscalculation—both home and abroad.
Could it be that the Republicans—who felt that Obama would back down as had been his method of operation up to that point—would not have shut down the government had Obama had a reputation for standing up and doing exactly what he said he was going to do? Of course, we will never know the answer to that, but it certainly gets one thinking. And regardless of who is responsible (and the American public mostly blames congressional Republicans), it is Obama’s economy. And in his economy, the U.S. dollar is not worth as much as it was worth before the 16-day shutdown and near default of the full faith and credit of the United States. Not when Chinese leaders come out—and they never come out—to call for the “de-Americanization” of the world.
Right now we are in the thick of the Website disaster that is the face of Obamacare. The optics for the president are disastrous. But the Website is merely a symptom of a much larger, systemic problem. And that is that Obama has surrounded himself with a cabinet—and a team of advisors—that rates no better than a “C” and really much closer to a “C-.” How else can you explain the fact that no one even bothered to tell the president that the Website for his one signature piece of legislation was in trouble before he could do anything about it?
I need not name names (and of course there are exceptions like Secretary of State John Kerry—his speech arguing for the bombing of Syria was a portrait in courage), but there isn’t a doubt in my mind that Obama is in trouble. Between the lack of action in Syria and the latest budget debacle that took us right to the brink of insolvency, this is a White House in crisis, whether they know it or not.
Is crisis too strong a word?
No. We are a country that has been weakened by this president. There is a crisis of confidence that has attached itself to this administration like the stench that sticks to a particularly odorous garbage landfill.
Let’s take Saudi Arabia as an example of how leader’s minds are changing across the globe toward the U.S. The Wall Street Journal reported that Saudi Arabia would no longer cooperate with the United States on arming and training Syrian rebels. That declaration came after Saudi Arabia surprisingly renounced its seat on the U.N. Security Council. The delegation explained it away by saying that it was upset with the Security Council’s lack of action toward Syria, but Prince Bandar Bin Sultan al-Saud allegedly told others that “this was a message for the U.S.”
The lesson is clear: the bigger the job, the greater the need for top minds and top talent. Hire people that do not measure up and your leadership will be crippled—and once you lose it, there is simply no place to go to get your reputation back. And this lame duck president still has three years to preside over a crippled America that he himself cut off at the knees with his own poor decision-making. Peter Drucker taught me a great deal [when I interviewed him for my book Inside Drucker's Brain]. He told me that the best leaders know how to hire, who to fire, and who to promote. If you measure second-term Obama against those Drucker leadership criteria, Obama fails on just about every level.
—-Jeffrey A. Krames, October 23rd, 2013
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
3:50 PM EST KRAMES UPDATE: I have been closely listening to several members of Congress today. And I must say that there are a few things that do not sit right with me. Why? Could it be that with about eight (8) hours remaining before the default deadline, few senators have actually read the bill that Reid and McConnell have cooked up? That might seem trivial, but what if there is something in there that turns off some members in either chamber—on either side of the aisle? Also, the timing is not what we were led to believe earlier in the day. We expected an afternoon Senate vote, but now it is not until this “evening,” or “after dinner.” This evening—you mean tonight? That is cutting things razor-thin close—especially when the House has yet to weigh in and will only do so until AFTER the Senate passes the bill. House Leader Boehner needs 117 votes to garner a majority of the majority, and I don’t see him getting much more than 100. There appears to be a deal here, but there is still some room, albeit quite small, for miscalculation. Now, we may see another strong rally in the Dow—just before the close or tomorrow—but we are up about 600 points since last Wednesday. In my mind, that means that there is little to no room for miscalculation or error. And that potential Fitch downgrade still sits in the pit of my stomach.
12:40 PM EST, KRAMES UPDATE: Senator Ted Cruz, the architect of the government shutdown, just gave a speech that indicated that he would not stand in the way of the Senate bill (any other option for him would have ended his career, but that is besides the point). This clears the way for the Senate to take up the bill first (which was in doubt, due to procedural matters), and then pass it to John Boehner in the House. Most House Republicans are expected to vote it down but there will be enough moderate GOP members to allow the bill to pass both chambers of Congress and have it signed by the President by midnight. This was baked into the cake already so we saw a little sell-off but the market is still showing strength—up about 190 points. The test will be if this turns out to be a “buy the rumor, sell the news” close. I also fear that Fitch downgrade which I feel in my gut is coming. This “management by crisis” is no way to run any organization, particularly the largest in the world. We are not going to escape this entire fiasco without some damage. Who knows how many jobs and how many tenths of GNP this shutdown—and a near-default—cost us?
10:45 AM EST, KRAMES UPDATE: As predicted earlier, it was announced that John Boehner will cooperate with the Senate deal. That means he will almost assuredly put any bill on the floor, with the full knowledge that it will be the Democrats that secure the vote withsome help from moderate Republicans. No FINAL deal in the Senate has yet been announced, but the Senate will be meeting to discuss this at 11:00 AM EST. Markets shrugged off the news.
KRAMES UPDATE: 10:22 AM EST. Word has come that a deal is about to be announced out of the Senate, which is what doubled the Dow’s gain. But that announcement came an hour ago. And today, an hour is a big deal. I still assert that even if a deal is reached today—and there is no certainty they will make the deadline—that this is way too close a call for Fitch. At some point, this is very likely to cause a downgrade, which will have real consequences on financial markets, etc.
For those of you new to my blog—especially to my fellow Zack’s members—Welcome!
If you have a few minutes, you might want to scroll down and skim a few of my recent blogs on the Beltway disaster and how we have arrived at the most dangerous moment since the Lehman Brothers bankruptcy. moment.
My goal in writing these “Inside-the-Beltway” pieces [and updates] will be to bring you everything I know as I learn it in real time: so today especially, please be sure to check back here every few hours for the latest “Default News” as it is breaking. However, the more reliable indicator of how things are progressing will be the financial markets, as always.
As my good friend Kevin Cook pointed out last night, I have been obsessed with the absolute dysfunction that has been plaguing our government this last month. The optics simply could not have been worse, which is precisely why late Tuesday afternoon credit agency Fitch announced that the U.S. is now on credit rating watch “negative.”
While a “watch” itself is not a downgrade—and important distinction—I believe that Fitch will indeed downgrade the United States, and likely sooner than later. That is key because the market lost about $1 trillion in stock market value the last—and only time—we were downgraded [by Standard & Poor's in August of 2011 for the very same reason---failure to raise the debt ceiling in an orderly and timely manner]. The greatest difference between now and then is that today is much worse.
Why? For two reasons:
1. This time, we have a better than 50 percent chance of breaching the Debt Ceiling midnight deadline; and,
2. The perception of the U.S. as a reliable and fiscally safe global economy is diminishing. You only have to read about what is being said/written about the U.S. in other countries to see how fiscal confidence in the U.S. is eroding by the day (and, in these last few days, by the hour).
For example, China, which holds $1.28 trillion in U.S. debt, recently came out strongly against the United States, something that is largely unprecedented for the usually “quiet” far-Eastern country. The China state news agency broke its silence and urged other nations to “rely less” on the United States:
“As U.S. politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to bring normality to the body politic they brag about, it is perhaps a good time for the befuddled world to start considering building a de-Americanized world”
I cannot over-emphasize the importance of that pronouncement, especially now, with only about 18 hours to go before the U.S. defaults. Again, it is not China’s way to issue any kind of pronouncement on other countries, especially one this negative in tone (in far Eastern countries it is considered disrespectful). That is why I think it is so critical that China did this. The U.S. dollar is not only the currency of America, it is the world’s currency. And if China and other vital countries believe that it is not in their best interest to hold this much American debt, the results could have a dramatic and swift effect on our financial markets.
It is interesting to note that China is not the largest holder of U.S. debt. The Federal Reserve is. They hold a third of U.S. debt (not necessarily a good thing), China holds 22 percent, and Japan 19 percent. So watch for any more pronouncements from China and/or Japan—as they could telegraph any negative moves that might trigger additional problems for our economy (I will also stay on top of those and let you know if we see any of that in the coming days).
Let’s switch gears for a moment and review exactly why we stand on the precipice of default today. About a month ago I wrote how dangerous it was for Speaker of the House Boehner to “delegate his leadership to Tea Party leader and Texas Senator Ted Cruz.”
Leadership always plays a role in times of crisis, and I have always argued that leadership is one thing that should never be delegated. Once Boehner gave the keys to “his” House to Cruz, the seeds of the shutdown and an ultimate default were sown (which is why I hold a great number of shorts in my portfolio to this day). Look at what happened as a result. Some pundits are comparing the U.S. House to a “failed nation state.” It is a leaderless morass of people at odds with each other with one particular faction eager to wreak as much havoc as possible.
However, leadership, especially in times of crisis, can be regained, and can be the vital instrument that can diffuse a crisis and avert ultimate disaster. In other words, there is still an opportunity for Boehner to play a decisive role in helping the U.S. to right its ship, at least in part. However, the problem is time. At the time of this writing, it does not appear to me that there is enough time for us to get a bill written and passed by both chambers of Congress and signed by the president to raise the debt ceiling by midnight tonight. I could be wrong, but at the very least it will be too close to avert a Fitch downgrade. If it fails to be signed by midnight, it is because there are too many moving parts to get every piece in place in time.
Now, if we fail to have a signed bill by midnight, no one knows what that means. Some say, since the Treasury still has about $30 billion in its coffers, that it is no big deal. I think otherwise, for a myriad of reasons. But here are the key dates that will come into play should we breach the critical midnight deadline:
October 17th at 12:01 a.m. the U.S. Treasury runs out of short-term funding maneuvers and loses its authority to borrow money (and for those congressional leaders who say this is not a big deal are sadly misinformed).
October 22nd: The Congressional Budget Office (CBO) runs out of its last $30 billion (which is what it estimates to have left on the 17th, and starts to miss payments).
October 23rd: $12 billion in Social Security payments are slated to go out.
October 31st: Congressional Budget Office (CBO) expects to have exhausted any cash remaining on hand. A $6 billion interest payment is due on that same day.
November 1st: $55 billion in Medicare, Social Security and military checks are “scheduled” to go out.
These dates show why some congressional members say that the 17th is not “default day.” Technically that is true; but it is the perception of what happens on the 17th that is so critical, and not only here, but around the globe.
What to Expect Today
The Senate will try to cobble together a final deal and commit it to paper (Reid and McConnell should never have stopped negotiating yesterday when Boehner said he was entering the fray, but that is water under the bridge). The Senate will hope to vote on the bill sometime this afternoon and if passed (and that is not a slam dunk), it will go over to the House. That is the moment of truth: will Boehner, knowing that only a minority of Republicans will vote on it, put it on the floor? This is where the House “Leader” can get back some semblance of leadership. I believe he will. He will finally do what he should have done before the government shutdown: tell the Cruz-controlled faction to shut up, sit down, and explain that we have done everything we could, and now the country must come first. If he puts it on the floor, it will get most—or all Democrats—and enough Republicans for the bill to pass. That to me is the most likely path.
What Could Go Wrong?
Ted Cruz could go wrong. If he—or any Senator chooses to object in the Senate—game over. That will spark a large enough delay for us to miss the midnight deadline. I find it ironic that in this great experiment that is Democracy that one man can bring the largest economy–even the global economy—to its knees.
Lastly, we end where we begin. The clock could go wrong. It can keep ticking past the hour of midnight. But at this moment the market expects a deal: the futures are up nicely, expecting a pre-midnight deal. Only time will tell.
Things can change quickly so stay tuned for updates later today!
—Jeffrey A. Krames, October 16th, 2013, 7:15 a.m.
It may be comforting to some of us that the U.S., should they default, will not be the first:
Russia defaulted in 1998 to the tune of $40 billion, causing some investors to pull money out of emerging markets.
In late 2001, following three years of economic contraction, Argentina defaulted on $95 billion of its debt obligations. Argentines pulled out $10 billion out of banks in six months.
In 2012, Greece beat them all by “restructuring” $270 billion in bonds—a new record that stands to this day.
Let us hope that we do not grab the world record from Greece in the days ahead!!
For those of you who have read some of my recent blog postings, you know that I feel that President Obama has taken a horrendous situation, not of his making—the shutdown of the U.S. government—and turned it to his political advantage. Now, with less than two days away from the first possible default on the American debt, I am not so sure that my calculation was correct. Could it be that I misread the situation, and that our 44th president is more patriot than politico?
Let’s look at where we are at this moment. I am writing this posting in the early morning hours of Tuesday, the 15th, with about 40 hours to go before we reach the U.S. Debt Ceiling. Yesterday came all sorts of great-news stories about how Senate Leader Harry Reid and Minority Leader Mitch McConnell have staved off Armageddon because they had made “substantive progress” and are “close to a deal.”
On the floor of the Senate, Reid could not praise his “friend” enough (even though the two despise each other), nor could he contain his enthusiasm (although with his awful monotone it is hard to tell): “I am optimistic that we will reach an agreement, that is reasonable in nature, this week.”
This week? Mr. Reid, may I remind you that we do not have “this week” to reach a deal. In fact, with only 40 hours to go and still no definitive deal in the Senate (I will get to the House in a moment), it is probably too late to hope for a deal by Wednesday at midnight, given all that has to happen to end this needless Debt Ceiling standoff.
What must happen between now to get to the finish line in time? Consider the following:
1. First Reid and McConnell must reach a definitive deal in writing, and it must be written up as legislation and then voted on by the Senate. That will take until Wednesday (the 16th) at the soonest—given the rules of the Senate—just one day before the deadline. And even that could be delayed if Cruz or a crazy-Cruz-crony objects to the amendment.
2. Assuming that the bill passes the Senate, it then must go to the House and Leader John Boehner, whom, for reasons to difficult to fathom here, is still very fond of his job. And it is the House where things are likely to go down in flames.
Let’s take a moment here and detail all the things that could go awry between now and Thursday at 12:01 am—the moment the U.S. defaults on its debt for the first time since 1789:
1. Reid and McConnell never reach a deal that is approved by the White House. That is unlikely. However, it is worth noting that all four (4) Congressional leaders were slated to meet with Obama and Biden yesterday at 3 pm EST at the White House. That meeting was “postponed” and not rescheduled. All of the cable news channels said that this was “a good thing,” for it proved that the Reid and McConnell were so close to a deal that they did not require the negotiating needs of the President or deal-maker-in-chief VP Joe Biden.
But is that the real reason the meeting never happened?
Or, could it be something more sinister, such as the fact that the two Senate leaders had included in their deal two Obamacare issues, albeit quite minor ones, which the President objected to? Once again, we don’t know, but according to news reports, the President is ready to sign off on the Senate “kick-the-cans-down-the-road” plan now. But there is still no deal, and as John Boehner likes to say, “there is no deal until everything is a deal.”
We do know that Obama has never once loosened his stance on Obamacare, demanding a clean amendment that included no demands whatsoever on his signature piece of legislation. As late as yesterday afternoon, Obama had said that he still refuses to pay a ransom for Congress to simply do their jobs. GOP senators are still asking for concessions before they would vote for the amendment. Could those two minor Obama clauses be the reason that there is still no deal? Possibly, but still unlikely.
What else could go wrong? There is always Mr. Cruz—the Senator who almost single-handedly shut down the government and had the absolute unprecedented chutzpah to complain about the shutdown with gal pal Sarah Palin on the National Mall this weekend, despite that it was Cruz himself who engineered the shutdown (a plan he had in the works since the first day he landed in D.C.). Could he be planning some shenanigans that could put a monkey wrench in the works? Yes, a filibuster, but this time, not a “green eggs and ham” filibuster, but a genuine, stop-the-legislation one. That could slow things down quite a bit and knowing how angry he is that his Senate colleagues appear to be caving, I would not be at all surprised to see Cruz pull something that would slow things down enough to push the process past the deadline.
Then there is the hapless John Boehner and his merry-men. And that is where the greatest chance of a disaster–or even a miscalculation—can happen. Let’s look at how that can play out:
Boehner can simply refuse to bring the bill up for a vote, knowing that most GOP members in his caucus will vote against it. But that is not likely, even though House Republicans will hate the Senate bill. But there is way too much pressure on him to simply punt. He has to bring a bill up for a vote, but not the bill up for a vote (or the House can simply bring their own bill up for a vote—and send that one over to the Senate before the Senate even votes in theirs).
Let me explain what else could happen. No, let someone else explain. New York House Republican Michael Grimm. He gave us a real glimpse into the Republican psyche last night. It was then that the congressman told CNN’s Anderson Cooper that while he is likely to go along with the Senate deal, that “we are likely to change something nominal and ping it back [to the Senate] because procedurally it is better to come from the House.” And there is where the wheels could come off the U.S. economy.
What if the House attaches something regarding Obamacare—let’s say something relatively minor, which could be anything. Obama and/or the Senate will have no choice but to issue a veto threat lest they give in to the very “terrorists” who started this whole government shutdown/Debt Ceiling Debacle in the first place. And if that happens, which is likely, there is no way a deal gets done before Thursday, and we breach the deadline.
And that is precisely what I predict will happen. Although at this moment in time the markets do not believe it, I see a better than 50/50 chance of that that nightmare becoming a reality. Instead of putting their party—or for more importantly the American people—ahead of their own selfish ambitions, Cruz and other Tea-baggers are likely to push us into default. And just the fact that the possibility exists should be sending shivers throughout the financial markets throughout the world. And do not think that Wall Street is not prepared for this outcome. Firms like JP Morgan and Goldman Sachs have been war-rooming this possibility for weeks.
So time will tell if the clock will win—or the world will win.
Things are moving quickly, so please stay tuned for frequent updates!
—Jeffrey A. Krames, 7:00 am, October 15, 2013
“It is easier to get into something than to get out of it.”
—Former Secretary of Defense and Architect of the Iraq War, Donald Rumsfeld, in Rumsfeld’s Rules
In 2002 I penned the first book ever published on then Secretary of Defense Donald Rumsfeld—A New York Times and Washington Post bestseller entitled The Rumsfeld Way: Leadership Lessons from a Battle-Hardened Maverick (Ironically, in 2008 and 2009 I did some work with Mr. Rumsfeld on his own memoir, Known and Unknown, Sentinel, 2012).
In researching my book, I had the good fortune to interview such figures as Dr. Henry Kissinger. But, despite the fact that Rumsfeld was the youngest Secretary of Defense (under Gerald Ford) and the oldest (under George W. Bush), there was almost nothing published on the man. For example, no major encyclopedia at the time even mentioned his name, never mind detailed his accomplishments. So how was I able to write such a book? By examining Rumsfeld’s own words—his speeches, his interviews and some of his own writings. It was then that I found “Rumsfeld’s Rules,” which consisted of more than 100 axioms that Rummy had written in the 1970s and updated from time to time.
Today, in the wake of a government shutdown entering its third week and a more-than-credible, unprecedented looming credit default of the United States, one of those rules stands above the rest to explain where we are today and how we got here:
“It is easier to get into something than to get out of it.”
Now, for those of you that have read my recent postings, you know what I think of the elitist, yet cowardly senator Ted Cruz. No one—except Cruz himself—disputes that it was Cruz that got the Republican party to shut down the government by insisting on some defunding or other alteration of Obamacare (The Affordable Health Care Act). The fact that this was a flawed strategy from the start should cannot be over-emphasized. For better or worse, this was Obama’s signature and sole piece of groundbreaking legislation. It has been passed by both houses of Congress, signed into law by the President, and upheld by the Supreme Court. There was always a zero chance that Obama would agree to any degree of blackmail by agreeing to diminish his signature bill to get a lifting of the Debt Ceiling or a re-opening of the U.S. government.
Obamacare, which had had embarrassingly-horrendous roll-out since it has gone live, has actually gone up in popularity by seven percentage points (so says the Wall Street Journal, hardly a bastion paper of the left). Obama can thank Mr. Cruz for that—since Cruz has now become such an abhorred figure of both the left and the right—that he single-handedly did precisely the opposite of what he set out to do (and something that Obama could not do himself. I think the junior Senator from Texas has forgot that Obama not only went to Harvard, he headed its Law Review).
Conservative writer and broadcaster Charles Krauthammer put Cruz’s strategy into proper context by calling it “nuts:”
“This is nuts. The president will never sign a bill defunding the singular achievement of his presidency. Especially when he has control of the Senate. Especially when, though a narrow 51 percent majority of Americans disapproves of Obamacare, only 36 percent favors repeal. President Obama so knows he’ll win any shutdown showdown that he’s practically goading the Republicans into trying.”
Yet, remarkably, Cruz still thinks himself a hugely popular figure despite the fact that it was his opinions, and more important, his actions, that has practically brought the #1 world economy to its knees. Cruz, the de facto head of the Tea Party, is now half as popular than the Democratic Party (despite the fact that the Democrats popularity has also gone down during this manufactured crisis). Cruz will become no more than a footnote to this emerging history, since he will go the way of such disreputable figures as Joseph McCarthy and Spiro Agnew. It was Cruz’s deeds and his Harvard/Princeton “strategy” that has brought the popularity of the GOP to 24 percent, an all-time low, and Obamacare, shooting in the other direction.
Now, let’s turn the tables and ask this question: What is the Obama strategy—what does he really want? This is where things get really interesting. Is it true—like Rand Paul has stated repeatedly—that he wants the unconditional surrender of the Republicans? No—he actually wants more—much more—and before you say that sounds like “nuts,” let’s look at history.
On this day, Sunday, the 13th of October, and four days before the potential default of America, following a Saturday evening White House budget discussion among Harry Reid, Charles Schumer and the President, comes new news: Obama not only wants an unconditional raising of the debt ceiling, he also wants to end the sequestration budget cuts—something that was unthinkable only a few days ago. Obama was pressing his advantage by opening up “a third front” and insisting that he not only get his “clean CR”—but more. This time he moved the goalposts. But you do not get to be president of the United States without being one of the most competitive people on the planet. And now that all attention is on the Senate and the talks between Senate Leader Harry Reid and Minority Leader Mitch McConnell, there is a new dynamic in place. Stay with me a bit longer as I once again rely on history to predict the way forward.
It was during Obama’s first term as President that Mitch McConnell stood on the Senate floor and declared that the first priority of his party was to ensure that Obama never got a second term. How did that go, Mr. McConnell? Now the fate of the country and the global economy rests, in part, on the man who vowed to kill Obama’s career—at a time that Obama holds every card in the deck and then some. This smells like a bad move by the Republicans. Did they forget that McConnell vowed to deny Obama a second term? The most competitive man in the world is not going to let this pass without exacting some degree of revege (“a dish best served cold,” and it is now ice cold, but no less important to the 44th president). And now we know how he intends to get it.
Before the Wall Street Journal polls that showed the Republicans at an all-time low, Obama would have been more than happy to get a clean Continuing [budget] Resolution [CR] and a lifting of the debt ceiling. Now we learn, following the Saturday night Democratic revenge-fest in the White House, that Obama has asked for more with what we’ll call his “third front strategy:” he now wants a lifting of the debilitating Sequester-level budget cuts—in essence, a blank check. All along, Obama has been playing chess while the Harvard/Princeton educated Cruz party has been playing checkers with all the skill of a four-year old. And it is pitiful figures like Ted Cruz and Mitch McConnell who are about to find out how badly they under-estimated the 44th president.
However, with that “third front strategy,” Obama may have shown us his cards. He may indeed be showing us how he intends to end this dangerous stalemate at the last minute and appear to be the “deal-maker-in-chief.” Since it is unlikely that Republicans will give in to this latest “demand” to lift the Sequester-level budget, he may be setting the stage for an 11th hour “capitulation” of that demand. This way, at least he can say that he gave the other side something. As for the timing of this, I do not see this happening until Tuesday, the 16th.
Obama has backed the Republican party into the worst corner in their history, and then has pulled the corner out from under them. With each passing “government shutdown” day the Republican party becomes less popular, and why shouldn’t it? After all, it was their strategy to defund Obamacare and shut down the government.
We all know it was a fool’s errand at best, and political nuclear war at worst, a war in which the GOP lost before they took the battlefield.
Obama will not give the man who declared to deny him a second-term any quarter. His goal is what Jack Welch, the former Chairman of General Electric, would call a “stretch goal” since the chances of achieving it is so remote: he wants to take back the House, a near impossibility. That is, unless he can play a role in lowering GOP popularity to crater to say 15 to 18 percent. If he can manage that, I believe he does have a chance to take back the House in 2014 and achieve new and important legislative feats, such as background checks for gun owners and new legislation on immigration.
Let me be abundantly clear: it is not spite that carries the day for this president, it is the hope that healthcare not be his sole legislative accomplishment. However, taking back the house in the mid-terms would be an incredible feat of brinksmanship, and will require Obama to put as many House Republicans on the unemployment line as possible.
The next five days will be like some terrible car-crash, difficult to watch but impossible to take your eyes off of. And lest Obama declare victory too soon, let’s remember that this is his economy. History always remembers the president in office when things go off the rails—they seldom remember the lesser-lights who helped things go afoul. But Obama knows that, too.
So what lies ahead? Unless I am dead wrong, we will see the Dow lose several hundred points—or more—before Obama gives an inch. He can afford to: after all, under him, the Dow more than doubled between early 2009 and today. Five hundred or a thousand points, which can be recovered quickly if the ship is righted before Thursday at midnight, is a small price to pay for a president who sees a chance at getting his House back.
This is a fast-moving event so please stay tuned for frequent updates!
—Jeffrey A. Krames, October 13/14, 2013, 9:45 a.m.
Here we are on day 11 of a U.S. government shutdown, and less than 130 hours from a Debt Ceiling Dooomsday due date. Despite those realities, yesterday the financial markets partied all day when it sent the Dow soaring for its biggest one day gain of 2013—a 320+ point rally. That party continued into Friday with a near 100-point gain (despite the fact that the Senate Republicans have just met with the president, which could result in a myriad of outcomes, yet to be disclosed). In fact, the 400+ point gain in the Dow is truly astounding, at least to me.
Because despite the fact that a few “kick the can” ideas have been floated and discussed, there is no evidence that any budget deal is imminent. Remember, we do not have only one “challenge,” to put it mildly, we have two impending threats to U.S. growth and our global economy. We have the shutdown of the government, and we have the looming Debt Ceiling stand-off—although the Debt Ceiling stand-off could be ended shortly. In all of the excitement on Wall Street yesterday, one fact is getting lost: and that is that House Republicans are still demanding “things” before they give in on anything, something that the president has rejected for months. And he means it. Really. He will not negotiate with a gun to his head or the heads of the American people. Yet they insist on demanding tax cuts and other GOP “favorites” like entitlements before they will agree to turn the government back on. Given that we are looking at the beginning of Week 3 of the shutdown next week, this is a very dangerous proposition. That’s because there is still much room for miscalculation, especially when you take into account the cast of characters, cuckoos, and egos involved.
So what has been the fallout of the government shutdown which rages on to this day? What happened to the GOP brand in all of this? That is where things get truly interesting. According to multiple polls, including Gallup and a Wall Street Journal/NBC poll, Republican approval has sunk to an all time-low—the lowest in 24 years (since Gallup started tracking these numbers). But what did House Leader Boehner expect? You should not be surprised when you give the keys to your car to an unpredictable, unruly, rebel without a boss-like-teenager, and find yourself mired in a deep ditch.
Consider these numbers:
* Less than one in four of the American electorate approve of the Republican party—worse than Watergate!
* Only one in five Americans approve of the Ted Cruz-led Tea Party
* Well over half of Americans blame the Republicans for the problems in Washington
* Less than one in three Americans blame the President for the shutdown
So what is the moral of the story? The Republicans have placed themselves in a huge box and then decided that the best thing they could do next was to assemble into a circular firing squad. In other words, we may be watching a truly historic event. The near-death of one of the two political parties of the United States—or at least a re-definition of one. Before I go too far down this path, however, historians like Douglas Brinkley have correctly pointed out that things like government shutdowns are quickly forgotten within a few years after they are repaired.
But this time could truly be different.
Yesterday I spoke to a very smart economist from the U.K. He told me what I already knew: that the rest of the world looks on at the lone super power that is America and is dumbfounded. How can such a powerful and rich and free nation be held hostage by heinous politicians that consistently put their own political needs above the needs of the American people? In fact, 70 percent of Americans feel that Republicans have put their own selfish political whims above the wishes of their constituents and the American people. It is that selfishness that stands between a budget deal and a proper functioning of the U.S. government. So the Senate Republicans will meet with President Obama in a couple of hours. My prediction is that this will not end in any resolution of the Government shutdown, even though it could result in an to the Debt Ceiling overhang.
Which means that the tiny faction of the worst part of our government still may have the power of getting their way by keeping the government shut down.
But only time will tell.
Please stay tuned for frequent updates!
—Jeffrey A. Krames, October 11, 2013, 12:30 pm EST
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
“We’re not going to be—I mean, we’re not going to be disrespected. And so that’s where we’re at today, where we have to get something out of this. And I don’t know what that even is.”—Representative Marlin Stutzman, Republican, Indiana
We are now five days into the first government shutdown since 1996. Now at least we know what it is about, thanks to the remarkable candor of the honorable Marlin Stutzman of the Hoosier state of Indiana. The Republicans, #1. Will not be disrespected, and #2. Want something out of this before they are going to do the right thing and end the misery that is affecting millions of Americans. Before you dismiss this as some kind of grim, tongue-in-cheek joke, let us take a closer look at these demands.
First, some history. The “We want Respect” comment is more pertinent that you might think. In 1996, when the government was shut down under President Clinton, his opponent, House Leader Newt Gingrich later admitted that the way in which Clinton disrespected him made him demand more to end the shutdown. Perhaps that was why that was the longest shutdown ever—21 days. [Let us hope and pray that we don't beat that record, because that will take us careening into the debt ceiling Armageddon due date---a discussion I will end this posting with].
So, how have we gotten here and why can’t we get out of it? Those answers are obvious. We got into it because House Leader John Boehner was unable to lead his caucus. And why was that? Because—and excuse the language—the junior Senator from Texas, the putz Ted Cruz, Tea Party ring leader, wanted to shut down the government. Hard to believe, isn’t it? but it’s true. Just ask another congressional Tea Party genius, Michele Bachmann, who remains under investigation by the House Ethics Committee, which may be why she has decided to retire at the end of the year (I count the days—85). What has she said on camera, incredibly enough? “We have never felt more motivated and energized,” [by the shutdown].
Unbelievable. People—millions of Americans—are suffering, and the United States is quickly becoming the laughing stock superpower that could not shoot straight (Syria), nor negotiate its way out of a paper bag (the shutdown).
With “leaders” like these, no wonder we are where we are. Ted Cruz is the single most dangerous, disingenuous, and disastrous senator since Joseph McCarthy (it was McCarthy who saw Communists in every corridor of Washington and Hollywood—he even went after Lucille Ball, for Gods sake). However, Cruz has miscalculated (a JFK favorite word). He wants nothing less than the presidency, but he is—and never was—a viable candidate. Cruz will go, in my opinion, the way of Michele Bachmann. Something terribly embarrassing will end his career sooner or later, as I am a strong believer in karma. He may even put the Tea Party out of business single-handedly. He has certainly diminished the Republican brand in a very real and enduring manner—although he went on national television to declare how he is simply representing the wishes of the American electorate. How stupid does he think we are? The only person Ted Cruz is capable of representing is Ted Cruz. Period.
Put another way, Cruz will burn out, and if he does not go the way of Bachmann, buried by some well-deserved Senate investigation, he will find his own hellish route to disrepute (I think he is there already, and I know I am not alone in that conclusion). Let’s not forget that at different times, characters like Herman Cain and Donald Trump were at the top of the polls on the Republican side of the presidential ticket, albeit briefly. Hell, the only thing congressional members agree upon these days is their burning hatred of the junior senator from Texas—Ted Cruz.
While Cruz gets his own special place in hell, there is plenty of “anti-leadership” to go around. After Cruz, the next poster boy for that label is John Boehner. Why finger him? Because Boehner cannot control his own Republican conference in the House. One distinguished Senator, Charles Schumer of New York, has called Boehner “a puppet in which Ted Cruz holds the strings.” That depiction is correct. Cruz is the current de facto leader of the House. The selfish and destructive faction he leads is holding the entire country hostage. But, and this is the key, Cruz could not do this alone. He needs co-conspirators, and I do not mean only the Tea Party extremists under his “hypnotic” powers.
The House Leader himself, John Boehner, is not only not leading—he is following the very worst in his party, no—the very worst in our country. He could stop the shutdown at any moment he chooses by simply putting the Senate CR (Continuing Resolution—-meaning the bill to open the government) up for a vote. He would have enough Democratic and Republican votes to end the shutdown. Why won’t he? Because it would almost surely end his leadership. In other words, he is putting his own leadership—not even his job, he would still be a congressman—above the needs of the country, and above the constitution (how can one pursue happiness when they have no paycheck or face cancer with no hope for help, and on and on). This is a sad state of affairs. Boehner is to be blamed, and while this is not an excuse, he is stuck between a Cruz and a hard place. But ultimately, John Boehner is the only Republican in the House with the moniker “Leader” in his title. No matter how we got here, it is his responsibility to get us out.
On October 6th, 11 days before the Debt Ceiling Armageddon date, Boehner is still sticking to “I won’t bring anything to a vote unless the President sits down and has a serious conversation with us” mantra. That is what he told ABC News George Stephanopolous on the Sunday morning This Week program. But Obama did negotiate in 2011 and that led to a huge loss of confidence in the American economy, a stunning 15 percent loss in the Dow, and the downgrading of the U.S. Credit Rating from “AAA” to “AA.” All that damage and the U.S. never did breach the default date. God knows what will happen if we do indeed go past the 17th of October with no new budget being passed. However, negotiating did not work for Obama last time out, and I don’t think Obama wants to repeat that 2-year old miscalculation again. History will tell us if he is right or wrong this time around.
That is why the dearth of leadership does not end with John Boehner. President Obama deserves his fair share. Not for what he has done, instead more specifically what he has not done, but how he has not done it. Obama often has a leadership tin ear. Why, for Peet’s sake, do you invite the Congressional leadership to the White House so they can have an awful meeting in which he repeats his mantra “I won’t negotiate.” He knows that Boehner and company will simply go out to the waiting microphones and mimic his “I won’t negotiate” mantra. That is awful optics for the president. Don’t misunderstand me. He should not negotiate over the debt ceiling. That tactic almost brought down the economy in 2011. But he can be far more clever in choosing how he won’t negotiate (more on that in a later blog posting).
So where are we? After this weekend, the government will be no closer to re-opening than it was on Day One of the shutdown. That creates a new and far more explosive possibility. The potential of the defaulting of America, something that has not happened in our 237-year history. Once the financial markets open Monday, Obama will still have the shutdown on his hands, but then our problem multiples because we will only be about 230 hours from the Debt Ceiling drop-dead date (October 17th) and the defaulting of America. So plan on seeing that countdown clock at the bottom of every cable news channel by sometime this next week.
And all economists agree that if default is allowed to happen, we will immediately be thrust into a recession that could be worse than the financial meltdown of 2008-2009. And not only the United States, I am talking about a deep and biting recession that will spread around the world faster than any infectious disease. A recession might happen anyway because we are surely losing several hundred million dollars a day in revenues, thanks to the shutdown. If we do not open for say, another ten days, we will likely lose about half to three quarters of one percent (or more) of our Gross Domestic National Product (GNP). And this to an economy that is merely treading water—with an unemployment rate that is much higher than reported (because so many people have given up on looking for a job—-called “non-participants”).
So, let’s hope that some sanity, and some leadership, will somehow return to our nation’s capital. This time, the stakes are way too high for anything else. But given the personalities involved, I fear the worst. Even though Boehner has said privately that he will not allow America to default, there are simply too many crazies running the asylum (and besides that, Boehner promised we would not shut down the government so his prognostication skills are as weak as his leadership).
And that is why I fear that this could be another “Tarp” moment. Smarter people than I say I am dead wrong and I pray they are right. The last time the congress (this time the 112th Congress) voted against a bill to save Wall Street, we lost 777 Dow points in a single day, and more than 15 percent in two weeks in August of 2011. That is why I sure hope that this time, the past is not prelude.
Please stay tuned for frequent updates as we navigate through this terrible situation.
—Jeffrey A. Krames, October 5/6, 2013
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 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
“Insanity: doing the same thing over and over again and expecting different results.”
I can’t believe the Congress, more specifically—the U.S. House of Representatives—has done it again. For the 40-something-time, the House has voted to pass a law ONLY IF ObamaCare (The Affordable Care Act) is de-funded. Since the chances of that happening is absolutely zero, there is no getting around this fact: this was an act of crazy people (not a word I have ever employed in my writings). These are the people that are well paid to represent the will of the people, and obviously shutting down the government is not what we sent these people to Washington to do. Yet even cautionary notes from people like Karl Rove and the Wall Street Journal Op-Ed page (not exactly bastions of the left), could not convince them to take a saner path. And they don’t even know—or care—that the choice they have just made may just shut down the U.S. government.
However, that is precisely what I believe the House has just set in motion. And if that happens, it will cost the U.S. much more than the $100 million a day it has estimated.
Before explaining how, here’s a few “fun” truisms. The smartest people I have ever known—people like Jack Welch and Peter Drucker—insist that leaders must “face reality” (that became Jack Welch’s mantra and his first rule of leadership). It is apparent that the 113th United States Congress can’t do even that. Never mind that both chambers of the current Congress has gotten less done than any other Congress since the earliest days of Thomas Jefferson’s tri-tiered vision of government (and much less than the so-labelled “do-nothing Congress” that served under Harry Truman from 1947-1949).
Conventional wisdom—as expressed by pundits and politicians on the Sunday morning shows—is that the Congress will right the ship and reach a last-minute deal before October 1st. But what they fail to realize that even if that happens, much damage would already have been done. In fact, I assert that some damage has already been done.
How? Let’s look at the events of the last 48 hours to find the answer.
On Friday, September 20th, the House actually applauded themselves on their vote to defund ObamaCare.
Leave it to this House to celebrate the politics of suicide, as most Americans will blame Republicans if the government shuts down. Although, ultimately, it hurts us all, but I expect it to reap its greatest damage on the GOP in the 2104, mid-term elections.
On that same day, last Friday, the U.S. stock market—as measured by the 30 stocks in the Dow Jones Industrial Average—fell by almost 200 points, making it one of the worst days of the year (this in a year when the S&P index is up nearly 20 percent). And nearly half of that selling on Friday took place in the last half- hour of trading—after the House vote. So, if you believe Isaac Newton’s law: “To every action there is always opposed an equal reaction,” then the stock market likely fell on Friday because of the uncertainty set in motion by the House vote. All stock market participants know that the stock market hates uncertainty. That is why the market fell by well over 700 points in early August of 2011 when the U.S. lost its triple “A” credit rating (and not only has it not gotten it back, Congress has the chance to take it down another notch or two in the next 40 days). And we have not even got to the Debt Ceiling debate set for early-to-mid October, one more land mine likely to trip up this obstructionist chamber of Congress.
One point of clarification: it is not only the House that has crazies. The biggest, most dangerous individual in either chamber is not the save-my-own-hide-no-matter-what House leader John Boehner, but the junior Senator from Texas, Ted Cruz. That is the man that has vowed to spare no action in tearing down the Affordable Care Act, which he knows was voted into law by both chambers of Congress, the Office of the Executive, and upheld by the highest court in the land. He is only too happy to play scorched earth politics, while secretly (or not so secretly) plotting a run for president in 2016 (please say it ‘aint so).
So now we wait and watch. If I am correct, or even if there is a last-minute deal, the stock market will be the ultimate scorekeeper of the Kabuki theater taking place inside the District of Colombia. If a deal is not reached by 4 pm Eastern Standard Time on Friday, September 27th, then the stock market will likely lose another 300-600 points between Monday and Friday of this upcoming week. And for one, I am betting heavily on my own blog posting by shorting the market in a big way. I have lost a lot of money over the years, but not once by betting heavily against the likely acts of an irrational chamber of our government.
—-Jeffrey A. Krames, Sunday, September 22, 2013