This note was originally published at 8am on October 04, 2013 for Hedgeye subscribers.
“Life is a series of collisions with the future; it is not the sum of what we have been, but what we yearn to be.”
-Jose Ortega y Gasset
Yesterday we (Keith and I) held a conference call with former Speaker of the House Newt Gingrich. We invited him to join us for a call because, frankly, he and former President Bill Clinton were the last two politicians to shut down the Federal Government, so he better than anyone understands the strategy of what is currently occurring in Washington, D.C. Even though he is an admitted conservative Republican, the call was both insightful and objective.
A key point that Gingrich raised is that a government shutdown is not as abnormal as it is being hyped and, in fact, may be a safeguard practice intended by the founding fathers. Certainly, government employees will be furloughed and people’s lives will be interrupted, but as the former Speaker pointed out, this has happened many times in U.S. history. In fact, it happened 12 times while Tip O’Neill was Speaker of the House. Overall, there have been 18 government shutdowns in U.S. history, including the current one.
Not surprisingly, most government shutdowns have been very short lived. In fact, the longest shutdown was 21 days in 1995 – 1996. The shortest government shutdown lasted only one day. In the Chart of the Day, we look at the length of every government shutdown over time. As the chart shows, the average government shutdown lasted 6.5 days.
Naturally, when we pressed Gingrich on how long he thought this shutdown would last, being the astute student of history he is, he answered 3 days to 3 weeks (which is what history shows). His view is that neither side has anything to gain by making this protracted. His caveat, though, was that there are currently no negotiations occurring as President Obama is unwilling to cede anything at all on the Affordable Care Act. According to Gingrich, while he and Clinton would go at each other in the press, and certainly had their differences, they would grind out solutions at the negotiating table.
The current set of actors are both polarized and talking matters personally, which is much different than the mid-1990s. There has never been much cross talk or cooperation between Boehner-Pelosi or McConnell-Reid, and it is seemingly only getting worse in this time of “crisis.” This unwillingness to negotiate and compromise is only exacerbated by the fact that neither President Obama, nor Speaker Boehner, have any concerns of getting reelected, so they are willing to expend personal approval for what they perceive as their party’s fundamental beliefs.
On the last point, disapproval is definitely mounting. As it relates to the President, his most recent approval polls are as follows:
- Gallup – Approve 44, Disapprove 50 -> Disprove +6;
- Rasmussen – Approve 47, Disapprove 51 -> Disapprove +4; and
- The Economist – Approve 43, Disapprove 53 -> Disapprove +10.
Not great numbers for Obama to be sure, but the approval numbers for Congress are even worse. According to the most recent Economist poll, a full 74% of Americans disprove of the job Congress is doing. Clearly, our elected officials are on a collision course with the next midterm election in which the polls turn to votes. If any of them yearn to be re-elected, they have a lot of work to do over the next year to gain back America’s trust.
Coming back to the government shutdown, if the politicians in Washington have any acumen, they will resolve their differences over the next few weeks before the fear mongering on the debt ceiling begins to accelerate. The stock market has been weak due to the dysfunction in Washington, but if amateur hour continues as the debt ceiling looms, risk assets are likely to be sold even more aggressively.
The White House is actually starting to use the debt ceiling as a bargaining chip and the Treasury Department released a report yesterday that outlined the potential macroeconomic effects of debt ceiling brinkmanship. According to a preview released by the Treasury Department:
“The report states that a default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, and U.S. interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse. By looking at the disruptions to financial markets that ensued in 2011, the report examines a variety of economic indicators – including consumer and small business confidence, stock price volatility, credit risk spreads, and mortgage spreads – through which a similar episode might harm the economic expansion.“
In as much as the economy doesn’t need brinkmanship over a debt ceiling, it also doesn’t need fear mongering from the Secretary of Treasury . . . but I digress. Ironically enough, the fiscal outlook of the U.S. has actually been improving, so in theory the rating agencies should be upgrading their outlook on U.S. debt and not considering downgrades due to partisanship in the nation’s capital.
Next week, we will be releasing our quarterly themes and this focus on the dysfunction in Washington will be front and center as we update our views on the U.S. economy and outlook for the U.S. dollar. An emerging conclusion is that Europe is starting to get relatively more interesting, which is supported quantitatively by the recent move in the Euro.
As you head into the weekend, we’ll leave you with a quote from Gingrich:
“What is the primary purpose of political leader? To build a majority. If voters care about parking lots, then talk about parking lots.”
Sadly, none of our leaders, whether it be in Congress, the White House, Treasury Department, or Federal Reserve, know much about building a majority as of a late.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.59-2.65%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research