A Shutdown or Debt Default Isn't in the Market

Given the recent developments in the Capital, and the very real possibility of either a governmental shut-down or debt-default imminent, MoneyShow's Howard R. Gold questions the fairly indifferent attitude many investors have towards it.

The clock is ticking on the prospects for a government shutdown and, even worse, a technical default on US obligations—and investors seem almost blasé about it.

The Standard & Poor's 500 Index (SPX) is down barely 1% since reaching its all-time high last Wednesday, after the Federal Open Market Committee declined to taper its $85-billion monthly bond purchases.

Meanwhile, since Labor Day, the yield on the Ten-Year Treasury Note (TNX) has dropped from nearly 3% to 2.65%. September may be a record month for investment-grade corporate bond issuance. And the CBOE Volatility Index (VIX) has barely budged.

And every day, we move closer to a government shutdown or debt default, with far knottier politics than we had during the debt-ceiling fiasco of summer 2011, after which the US lost its AAA rating from Standard & Poor's.

"The complacency on this issue is alarming," Chris Krueger, Washington analyst for Guggenheim Partners, told me earlier this week. "Clearly with Washington policy, everybody's been focusing on the Fed and the taper," he said, and are only now looking at the prospects of shutdown or default—and aren't worrying too much about it.

"Our growing concern is that everyone is far too complacent that just because there has been a deal in all the prior fiscal cliff fights that there has to be a deal in this debt-ceiling fight," he wrote in a note to clients. "There is no evidence to suggest that the debt-ceiling will be raised in time."

Read Howard's August piece about how There's too much Complacency in the Market on MoneyShow.com.

Krueger clearly thinks the debt-ceiling fight is the more dangerous one, but avoiding a government shutdown may not be a slam dunk, either. Here's why.

In recent years, Congress has passed continuing resolutions (CR) instead of formal budgets to fund the government. The latest runs out on October 1, which is when fiscal year 2014 begins. Without that funding, the government would begin shutting down.

But some Tea Party-backed senators, like Ted Cruz (R-Texas) and Mike Lee (R-Utah) have pushed to tie passage of the CR or extension of the debt-limit to cutting-off funds for Obamacare. The House of Representatives defunded Obamacare in its CR, which the Democratic-controlled Senate is now taking up.

But the Senate bill would likely include funding for Obamacare, and it could pass by Saturday. That would give the House a short time to either cave to the Senate's budget or vote it down, setting the stage for a government shutdown.

Krueger puts the chances of a government shutdown at 40%. If the government does shut down, federal employees may be furloughed, and national parks and museums could close, although air traffic controllers and border patrol officers would likely remain on duty.

NEXT: Default is another story

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