US Government Shutdown … What now?

This weekend, exactly one year since President Trump’s inauguration, the US Government shutdown became a reality as the US Senate were unable to agree a deal, meaning the US Government at the time of writing this article is now shut down.

Of course, essential functions will still operate, but this is still a big problem that needs to be resolved.

There will obviously be a lot of blame going back and forth from politicians and even certain media outlets. In this article we aim to bring an element of clarity by explaining some of the details in an impartial, non-bias way.

However, before we get into that, s important to put something into perspective. We are not the biggest fans of Donald Trump, but we don’t think it’s particularly fair for people to be using this as an example of why he isn’t a good president and to be pointing it out as a big failure. Of course, this is a failure, but it’s clear that it’s happening due to political agendas on both sides of the aisle.

 

Shutdowns

Although we are not the biggest fans of Donald Trump, we still feel it is somewhat unfair to use the shut down as evidence of why he is an incompetent president. Although this is obviously a failure, it is one that should be directed at both sides of the aisle, not just Trump or the Republicans.

In fact, it is not only President Trump that has experienced this situation. To put it in perspective, there have been 18 shutdowns since 1976. This includes under Presidents Ford, Carter, Reagan, Bush Senior, Clinton and President Obama. Therefore, it is not something that should be used to single out Trump’s incompetence.

On that subject, if we want an example of a shutdown occurring due to incompetence, we only need to look at Reagan’s administration where they missed the deadline on a spending bill because the Democrats had a $1000-a-plate fundraising dinner to attend and Reagan decided to host a barbecue for Republicans. Putting social engagements ahead of the nation’s interests is a unique style of governance!

 

The Details

The vote on Friday was to agree a funding stop-gap, a Continuous Resolution (CR) that will allow the talks to continue without a shutdown. Unfortunately, this was not achieved. The Democrats as a majority were against this and blocked any possibility.

In terms of the vote, only 50 senators voted in favour, meaning the Republicans did not achieve the 60 votes they needed to pass the spending measure, which the House had already agreed on Thursday. Of these, only five Democrats voted in favour and, in fact, five Republicans even voted against it.

This whole process has been a mess and full of political games. There have been claims on both sides that have been denied, obviously a lot of these targeting Trump or coming from him. For example, Democrats claim Trump convinced them that he would support them and be flexible in agreeing a deal, but then suddenly flip-flopped and switched to a more conservative stance. There have been occasions when the Democrats claim a deal is all but agreed, before Trump ends up walking away from it. Even Mitch McConnell, the Republican Senate leader, claims he cannot figure out Trump’s position on the issue.

This has been amplified by Trump’s comments on social media, which effectively are going against claims coming from the White House. For example, Trump criticised the house stop-gap funding bill, despite the White House earlier that day stating that he supported it.

John Yarmuth, the senior Democrat on the House Budget Committee on Friday said:

Donald Trump is not capable of carrying out this kind of an intricate conversation about issues… he doesn’t have the attention span to do it. He doesn’t have the interest to do it. All he wants to do is show he’s engaged in the process.”

As we said before, this is not entirely fair and a lot of it is just finger-pointing. It is undeniable that Trump is also at fault, but both sides need to make compromises and come up with an agreement. It is surprising that this has not been able to take place. We saw how Obama struggled when he did not have full control of the house, but this situation ought to be somewhat different to that.

In terms of the major issues at play, there are three things that seem to be brought up a lot: the CHIP program, DACA and the Wall.

 

The CHIP Program

CHIP stands for the Children’s Health Insurance Program and this is being used as a bit of a political chess piece. A number of months ago, funding for this technically expired, but there has not been any agreement yet to extend it long term.

It seems Republicans may be holding this as a Trump card (pun not intended!) to get something agreed in return. However, this is a popular, bi-partisan program, which covers 9 million children and has proven benefits for children’s health and family financial well-being. It provides low-cost health cover to children from families that earn too much to qualify for Medicaid.

The Republicans in an attempt to get a continuing resolution agreed, included a 6-year extension of CHIP as part of the agreement. However, this was not well received by the Democrats. Nancy Pelosi inappropriately responded by saying:

“… this is like giving you a bowl of doggy doo, put a cherry on top and call it a chocolate sundae“.

Pelosi wanted the deal to be agreed for 10 years instead, which would supposedly save the government more money than a 6-year reauthorisation. However, this could be seen as a stubborn stance to take when the alternative is for the government to shut down, which would clearly lead to economic losses.

 

DACA and ‘the wall’

The Deferred Action for Childhood Arrivals program (DACA) is a Federal program that was created under Obama in 2012 to give people the temporary right to live, study and work in the US if they were brought to the country illegally as a child.

The number of people that have gained approval under this program stands at near to 800,000. Last year Trump caused an uproar by announcing his intention to stop the program. This has left the “Dreamers” (which is what DACA recipients are known as), in a state of uncertainty.

DACA is extremely important to the Democrats, to the point that they will not agree to any spending deal that does not cover it. It is easy to fall into the trap of believing this is simply down to political ideology, but the truth is that a lot of this comes down to votes.

By looking after the Dreamers under DACA, the Democrats can rely on the majority of their votes in future elections. Of course, this is not the sole reason, but it is clear that there are political games being played here and we have to be realistic.

The Republicans appear to be mixed about DACA, so it is uncertain where the majority stand with this. Even Trump’s view on DACA was unclear, with his Chief of Staff John Kelly claiming Trump’s views on ‘the wall’ were uninformed and that he has changed his attitude towards DACA. Trump then responded to this by going on a Twitter rant, with the now infamous line “the wall is the wall“. Although to a certain extent his views on DACA are still uncertain.

In a nutshell, this is where things stand right now. In the next few days there will be a lot of soundbites aimed at convincing voters the other party is to blame; using things like the military to play on people’s feelings and stir up emotions. However, the truth is, both sides need to remember they are governing the most powerful nation on Earth and have a huge amount of responsibility to the public to agree a deal that is for the good of the nation and not just their political party.

 

So where does that leave things for the markets now?

US stocks closed on Friday at record highs and 10-year bond yields were at 3-year highs, however the US dollar had been suffering from a steady decline for most of the week.

Overall this may show that the markets are not too concerned about the negative economic impacts of a government shutdown. If we take the 2013 shutdown as an example, it only led to around 0.3 being taken off the fourth quarter GDP growth and that shutdown was for 16 days.

Although the markets were closed when the news was announced that the government would shut down, it is clear that the prospect of it happening was not having such a disastrous impact. Therefore, we think it is safe to assume that there will not be any severe negative impact in the markets as a result of the shutdown. Of course, there may be still be a relatively minor negative impact, but it is not going to be anything drastic.

That leaves us with a lot more potential upside and more opportunity for positive surprises to the market.

Stocks have been on a relentless bull run and we favour not taking long positions there for now. Not because we are determined there will be a correction soon (we actually don’t have a horizon in mind for that right now), but because we think upside is limited in comparison to other markets.

When we look at the 10-year yield, with other major factors in mind (not least of all the Fed balance sheet reduction) we may start to see yields continue to rise and end the huge bull run we have been seeing in US bonds. Having said that, going against such a strong trend is always risky.

That leaves us with the US dollar. We do genuinely think the weakness in the dollar has been overdone recently and any positive news could lead to a solid correction there. In terms of the major pairs to use, we would be looking at GBP, AUD and EUR.

With AUD, we are back at the highs that we were seeing as overbought last year. However, the technicals are strong in this move up, so we would prefer not to take any action until clearer structure begins to build.

Looking at GBP, there are still risks relating to Brexit, with changes in the political situation causing sudden spikes in the market. Although the current situation is tempting, we prefer to stick with euro, where there is political and economic uncertainty that could lead to weakness. It seems the gains in euro have been overdone in isolation, therefore signalling more potential for bearish movements.

2018-02-11T16:16:21+00:00

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