Ok look, “honey badger don’t care” seems to be the narrative for markets when it comes to the U.S. government shutdown.
And that’s only fitting, because “honey badger don’t care” is generally how the market has approached every, single geopolitical hurdle we’ve encountered since Brexit.
To a certain extent, this is emblematic of the dissensus-driven vol. selling regime, the noisy status quo, and the BTFD mentality instilled by central banks which now runs on autopilot.
That said, what we’re seeing in D.C. is disconcerting, especially in light of the fact that the situation seems to be more contentious than usual this time around thanks in no small part to a certain “very stable genius” and, perhaps more to the point, his advisers (we’re looking at you, Stephen Miller).
Here’s how Bloomberg’s Richard Breslow put it last week:
So how are markets reacting? With remarkable oblivion. After all, we’ve been trained to believe that geopolitical turmoil is merely an opportunity to get ahead of the next round of central bank asset buying. At some point, investors may indeed learn that utter dysfunction in the world’s hegemonic superpower has consequences not easily swept under the carpet of positive carry.
Indeed. But shutdowns haven’t generally resulted in too much market turmoil over the years so if you’re the type who likes simplistic narratives, you could simply say: “this hasn’t generally mattered for markets before, so why should it matter now?”
Here’s a handy table from BofAML:
There are some caveats here. Here’s BofAML describing why this time is at least a little bit different:
There have been 12 government shutdowns since the early 1980s with the shortest lasting 1 day and the longest 21 days (Table 2). These shutdowns have occurred under a split government, meaning that the two parties controlled at least one chamber of Congress or the White House. The current shutdown is unique since the Congress and White House are controlled by the Republicans. More than half of all government shutdowns ended within 3 days but the last 3 shutdowns have averaged over 14 days. If recent history is any guide, we could see a resolution within a few weeks. However, the unprecedented nature of the current shutdown (i.e. one party control) and polarization of the two political parties makes it difficult to handicap when a resolution will materialize.
Now recall what we said on Sunday evening in our weekly preview:
Objectively speaking (and we don’t often speak objectively about Trump) this was a poor political gamble for the President. Americans have come to expect ineptitude from lawmakers and approval ratings reflect how low the bar truly is. From a reputational perspective, Congress really doesn’t have much to lose here.
The approval polls have already been harsh on Washington. Even before the shutdown, only 1 in 5 Americans approve of the job that Congress has done and there is a historically low approval rating for President Trump. According to Gallup, when asked about the most important problem facing the country, 25% of Americans report it is due to a dysfunctional government (even before the shutdown). This only threatens to head higher – back in October 2013, this was as high as 33%.
We would once again reiterate that this was a poor gamble for Trump. While his approval rating is pitifully low, it’s still markedly higher than that for Congress. He’s got far more to lose here.
Of course the real “losers” from this don’t include Trump, or McConnell, or Schumer, or America’s reasonably well-to-do investor class.
Rather, the “losers” are everyday Americans whose faith in their elected officials’ capacity and willingness to govern has now eroded even further.
But you know, it’s like Lincoln said, this is government “of the people, by the people, and fuck the people.”