Hot Off The Wire – 23 September 2013

The US Government Shuts Down For Four Weeks!

The primary cause of the shutdown – The President vetoed a bill from the Republican-supported Congress that meant to derail his policies on education, the environment and of course, healthcare. The President and the Speaker of the House were the key players in the disaster.

The cost of the shutdown, not including any personal costs arising out of late salary checks, was estimated to be about $1.5 billion. Visas were not processed and national parks and museums were shut down.

This is not a headline story from the future that we retrieved using our time machine. This is a summary of events that happened from November 14th to November 19th, 1995 and then again, from December 16th, 1995 to January 6th, 1996 as President Clinton and the House Speaker, Newt Gingrich, sparred with each other leaving the fate and salaries of the US government employees and its armed forces hanging in limbo.

History is repeating itself. There is barely one week till the September 30th budget deadline and the Congress, Senate and the President need to reach a budget compromise by then. The Congress complicated matters on Friday by agreeing to pay for everything in the budget excluding the President’s landmark health care law, ObamaCare. Now that the bill is at the Democrat-led Senate, this stipulation to defund Obamacare will likely be erased and the bill will revert to the House. John Boehner and his allies then have two primary options: 1) to endorse the Senate-approved bill, which Obama will subsequently sign into law or 2) to rebuff the bill, thus, initiating a shutdown.

And all this – in barely a week!

The markets are waiting with baited breath and will react to every shred of news coming out of Washington in the coming days. While the budget is not preying on the market’s mind yet, as we get closer to the deadline, it is likely that we might have some more declines founded on the government shutdown scare. The markets were down on Friday with the Dow Jones Industrial Average falling by 1.19% and closing at 15,451.09, while the broader market index, the S&P 500 was down 0.72% and ended the day at 1,709.91.

We hope President Obama and Speaker John Boehner remember the disastrous outcomes of the Clinton-Gingrich face-off and refrain from moving to the end game. President Clinton was re-elected a few months after these events, while Newt Gingrich went into political oblivion; even Republican Party fellow members commenting later agreed that the Speaker had not made a strategically sound choice by taking on the President.

WSA Prediction: We do not see the budget showdown actually going beyond the deadline. History has hopefully taught Speaker John Boehner that posturing is one thing, but going the whole nine yards will certainly not help his political career. To that end, we ask investors to buy on the dips caused by a shutdown scare and sell when it does not occur.

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