Debt ceiling extended, taper back on, short stocks?!

By Ben Turney.

If it wasn’t for the last minute, nothing would ever get done in American politics. For the third time in a row, a compromise was reached, seeing the debt ceiling temporarily extended, the government reopen and the crisis averted.

In reality, absolutely nothing of any substance was achieved last night, other than a further delaying of the inevitable. America’s structural deficit remains unchecked and the shutdown of the last few weeks will prove to be utterly pointless, as federal workers will receive back pay. The Federal Government is now permitted to continue borrowing until February 7^th next year.

This might sound like we have four months to wait until the next instalment of this never ending drama, but there are some potentially significant repercussions of what has happened in the last few days, which could have altered the landscape dramatically.

First, Republican credibility has been shot to hell. They made a play for massive concessions in Obamacare and ended up walking away with nothing. Apart from the obvious embarrassment this will cause them with the electorate, the chances are there could now be some serious infighting, as the Tea Party faction targets the gravely weakened House leadership and their traditional Republican supporters.

What is happening to the Republican Party at the moment appears to be very similar to the traumatic experience the Conservative Party experienced, in their long-running disagreements over Europe. Whether or not this will result in the Republicans becoming similarly unelectable in the eyes of voters remains to be seen, but it appears they are already bearing the brunt of public anger at the manner in which the latest crisis has been handled.

Whatever the case, having lost so badly this time, it is now highly unlikely the Republicans will adopt a similar approach at the start of next year. Even if they were mad enough to try again, their ability to pursue a similar, obstructive strategy has been severely hampered.

This brings us to the second, more important, repercussion of last night. President Obama now has authority to raise the debt limit. He can only be stopped from doing this by a two-thirds vote in both Congress and the Senate.

Earlier in the week, I wrote a fairly speculative piece, suggesting America would do away with its debt ceiling. I believe they have now done this in all but name.

To give you an idea why I think this consider the split in Congress and the Senate. In Congress there are 232 Republicans, 200 Democrats and 3 vacancies. In the Senate there are 52 Democrats, 46 Republicans and 2 independents (both of whom tend to vote with the Democrats). To stop Obama from raising the debt ceiling in future, the Republicans will need to enlist the support of over one-third of the elected Democrats. There is little to no chance of this happening. Considering the internal divisions of the Republican Party, it is not even certain they could count on the support of all their elected members in such a move.

Presented with this fait accompli, all eyes should now turn towards the Federal Reserve.

The FOMC’s penultimate meeting of the year ends on October 30^th. Last month, the market expected them to announce the tapering of QE. This didn’t happen and the explanation was because of the political uncertainty. Now that the political uncertainty of the debt ceiling is removed, there has to be a strong chance that the Fed will now act.

Watch this space, but I am now looking extremely closely for an opportunity to go short. If there is a rally of relief at the extension of the debt ceiling, this could provide it.