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The Administration Who Cried Wolf image

Editor's Note: After a weekend of travels, Dave has asked friend and colleague Paul Schatz to fill in for him and provide commentary on the standoff in Washington this morning.

With the exception of those directly affected and impacted by the government shutdown, it doesn’t seem like the public really cares. If it wasn’t constantly shoved down our throats by the media, I am not sure most people would even know. From the polls I have seen, the public is not in favor of closing the government as a strategy to forestall ObamaCare, but at the same time, they are also not in favor of ObamaCare itself. So conclude what you may.

Over the years, I think we have learned that with any public and serious negotiation, the two sides never really compromise or present reasonable offers until the second before midnight. This happens almost all of the time with the airlines and their unions. It happens every time with anything in Congress. In sports, sadly, we often see the two sides dig their heels in so much that a lockout or strike ensues.

My opinion today remains the same as it was before this began. Once the shutdown got passed a day or two, it was going to continue at least until the debt ceiling was hit in mid October. The incentive to open government now only to have the debt ceiling in a few days is very small. And speaking of the debt ceiling, the administration has said that October 17 is the hard date, the line in the sand. No matter which side of the aisle you sit, it’s generally accepted that the ceiling absolutely must be raised.

But it’s a long way between now and that compromise, or is it?

Yesterday, the Treasury Department pulled out all stops in screaming “FIRE” in a crowded theatre.

“In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth… Credit markets could freeze,the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”

As I recall, we heard the same garbage regarding the “dreaded” fiscal cliff late last year with recession and interest rates spiking and markets collapsing. I laughed each and every time DC spoke (actually called it a hoax) and used it to our clients’ advantage in Q4 2012 and especially Q1 2013. Only a few months later we were bombarded with sequestration, automatic budget cuts across  the board resulting from a bipartisan compromise reached in August 2011. If you recall, these cuts were going to send our economy spiraling into recession with spiking interest rates and collapsing financial markets.

By my count, the economy is the same mediocre, post crisis economy it was six months ago or maybe even a bit stronger. The stock market is up more than 10% and while rates have risen substantially, I think it’s fair to say that the reasoning behind it is the Fed taper and not anything having to do with sequestration.

So forgive me if I completely and utterly dismiss the scare tactics and hyperbole from the U.S. Treasury. Talk about the administration who cried wolf! The problem is that one day there will really be a crisis just ahead of us and after all this nonsense, it will be largely ignored.

So how do I think this will all end and what will the impact be on the financial markets? 

Putting myself in John Boehner’s and the GOP’s shoes, they are being viewed as the culprit so far with the President carrying the message about the debt ceiling and Armageddon. If I am Boehner, I would send a bill to the House floor raising the debt limit immediately without any strings attached. It would easily pass both chambers without much debate. Then I would dig my heels in on the budget and stop trying to repeal ObamaCare until the GOP has the majority of the Senate. That takes the President’s disaster scenario off the table and changes the message.

The President’s best path is to stay the course and tone down the rhetoric a bit. I would keep painting the GOP as obstructionists and harping on the fact that ObamaCare is a law that was upheld by the Supreme Court. A law that needs some tweaking but only after we get by these two crisis’. He should offer specific concessions on entitlement spending and tax reform to try and fracture the republicans into a deal.

In the end, we are likely to see what we have seen for several years, a last minute deal that raises the debt ceiling and funds the government for 3-6 months. Sad and pathetic, but true.

All the best,

Paul Schatz

Paul Schatz is President and Chief Investment Officer of Heritage Capital, LLC, in Woodbridge, CT. Paul developed and manages all eight of the firm's currently offered investment programs.

Be sure to check out Paul's Blog: Invest For Tomorrow

Turning to this morning... Although most analysts do not expect the U.S. to default on its debt payments, the fact that neither side is moving toward a solution is weighing on global markets this morning. The optimism stemming from the idea that a path to a solution was possible, which was responsible for Friday's lift into the close, is now gone as House Speaker Boehner told the press Sunday that there are not enough votes for a "clean continuing resolution" at this stage. As such, U.S. futures are giving back all of Friday's advance and then some in the early going.

Positions in stocks mentioned: none


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