October 6, 2013

Kass: Shutdown Showdown - TheStreet.com

High theatre lies ahead.The continuing-resolution and budget issues have merged into one.A twelfth-hour compromise on Oct. 16-Oct. 17 seems likely.Given data-release issues, a taper is not probable until March 2014.

It is clear that the government shutdown, continuing-resolution and debt-ceiling issues have now merged into one problem that will require one solution.

My Washington, D.C., contacts suggest that there is currently a stalemate, as neither side is yet talking to the other side.

With the debt-ceiling limit not in place until Oct. 17, it seems almost inevitable that the government shutdown could last another 13 to 14 days until an on-the-brink decision is made on the debt ceiling (see outcome No. 4 below).

Thus far, the stock market has meandered, and investors are complacent. While the DJIA and S&P 500 are slightly off their highs, the Nasdaq and Russell 2000 are basically at all-time highs. In other words, to date, the stock market is not placing pressure or forcing action in Washington. My explanation for the lack of market movement to the downside is that the broad "Bernanke put" seems to have (thus far) protected the markets from much downside.

At this point, President Obama is leaving for a trip on Sunday, and he plans to return about four days later. So, nothing will likely happen during next week. There are several possible outcomes to break the logjam in Washington, D.C. between now and Oct. 17:

1. A crack in the U.S. stock market could force action. (This is always a possibility.)
2. Boehner blinks. (A small possibility.)
3. A partial solution is offered if the debt ceiling is breached in which either Treasury payments would be prioritized or the president issues an executive order to lift the debt ceiling. (A low probability.)
4. A late-hour compromise on Oct. 16. (The highest probability and likely outcome.)

The consequences of breaching the debt limit would result in a dire outcome. It seems likely that debate will go down to the wire, but a compromise will be made at the last minute.

It is important to recognize that the current shutdown will bring a halt to the release of government economic data. If I am correct that the decision comes close to Oct. 17, the economic data vacuum will make it difficult for the Fed to properly assess the economic condition on a timely basis.