BUZ LIVINGSTON: As the debt ceiling drama churns

Published: Thursday, October 17, 2013 at 04:24 PM.

State Street Global Advisors (SSgA) held a conference call last week focusing on the implications the debt ceiling impasse and government shutdown holds for investors. Being disgusted with talking heads’ babble, State Street ’s unemotional approach seemed valuable. When emotions dominate, investments suffer. With a corporate history dating back over two centuries, this is not their first rodeo. Always an innovative firm, State Street Global created the first exchange traded fund, SPY, which tracks the S&P 500 and manages over $350 billion around the world.

While the press makes a big deal about Oct. 17, it is not our fiscal Rubicon, especially after the deal that came down Oct. 16. Rather Nov. 1, in SSgA’s opinion, loomed much larger. Nov. 1 means bond and bond interest payments come due along with Medicare, Social Security and other government obligations. Imagine MSNBC and Fox wrong about the same thing. 

While disillusioned about a near-term resolution, the chance of running past Nov. 1 was always infinitesimally small, less than one percent. They peg the likelihood of a debt limit agreement before Oct. 17 was set at 50/50. It turns out it didn’t even take a “market event”, aka severe decline, to force Congress into doing what it does best — kicking the can down the road and coming up with another short term solution.  

The panelists drew their negative view from Congress.

Several members of Congress theorized Treasury had sufficient funds to prioritize payments, a point debated by Treasury Secretary Lew. The Social Security Trust fund obviously has enough money to pay beneficiaries, but U.S. debt has always been 100 percent safe and prioritization erases it.

The panel also anonymously quoted senior Congressional staff members who felt the debt ceiling was a prime shot to shrink government. While I did not attend Harvard or Princeton , in seventh grade government class Mrs. Willie Florence Pearson taught us that to change the government Congress passed laws and the President signed them. Also quoted was an unnamed Texas House member who admitted the debt ceiling was foolish, but reluctantly played ball to dodge a primary challenge.

SSgA sees 4th Quarter Gross Domestic Product growth losing .1 percent per week of government shutdown but notes the economy could catch up these losses later in the quarter. However, with no resolution past Nov. 1 we could be looking at a very significant GDP slide reminiscent of 4th Quarter 2008.



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