October 2, 2013 Update

DJIA:15,192 S&P 500:1,695 NASDAQ:3,818 Gold:$1,295 Oil:$101.73 EURO:$1.35 YEN:97.53

More Dovish Signs 

The U.S. federal government has partially shutdown for the first time in nearly two decades. And consequentially, congress’ inability to overcome stubborn partisan deadlock will create horrendous effects that will take years to fully ripple throughout the US economy. The short-term implications of this partial shutdown is the revenue loss of $300 million a day from the failure to produce economic output, as noted by IHS. This seems bad, but a $300 million loss is negligible for the $15.7 trillion US economy. To offset the loss, the government experienced a unique combination of incurred savings; which included not employing 800,000 federal workers, not funding the cost of operating national parks, and not having to financially support select government sponsored services. The costs curbed by a partial government shutdown are unknown, but likely outweighed the revenues lost. The long-term implications of the congressional inefficiency are far more serious and threatening to the well being of the country and economy than the short-term problems it created. The failure to negotiate will change the meaning of doing business with and in the United States. There will be a significant loss in trust and credibility in the full faith and credit of this country. The distrust in the system runs a high risk of prompting a second downgrade of the US sovereign credit rating. There’s also a sizable possibility that a partial shutdown of the federal government will result in layoffs in the public sector, which would, as such, increase the unemployment rate. A rise in unemployment would not only revert the recent signs of recovery in the labor market, but would send additional mix messages to the asset markets, which continue to confuse bad news with good news. Higher unemployment would further enlarge the disconnect between the Fed’s target jobless rate and the  actual level of employment in the US, forcing the central bank to keep buying risk-less securities at an enormous monthly pace. And since the public sector would be driving the unemployment rate upwards and forcing the Fed to continue providing liquidity to the markets, quantitive easing would become more entrenched in the political process than ever before. The more political QE becomes, the more difficult it will be to implement tighter monetary policies. But maybe this is what politicians are after. Maybe this is what lobbyists are pushing for. American corporations and investors who are using financial leverage to bolster returns are enjoying a free lunch while the Fed keeps the printing presses hot. Maybe corporate entities want QE to become more woven in the political process in order to prolong the monthly asset purchases. Or could it even be possible that the central bank is more politically connected than they lead investors to believe? Could the Fed be using politicians to mask their dishonesty, manipulation of interest rates, and distortion of financial markets? In a recent survey by Reuters, only 27% of Americans knew what QE was. Politicians are doing a great job of keeping Americans in the dark. This is speculation, but I just don’t believe the government does anything by accident. But even if there is no connection between the intentions of the central bank and the White House, I think it’s inexcusable for elected officials to increase the risk of weakening the country’s credit profile. The economic and financial effects of the partial government shutdown are going to be felt in the markets for some time to come. And unlike the government, the markets won’t partially shut down because they’re inefficient, even in the most bullish or bearish of times. 

Domestic News

• Market Update Futures are down as uncertainty about the debt ceiling builds.  
• The ADP employment report will be released at 8:15, and private payroll for September is expected to have increased to 180,000 from August’s 176,000. 

International Updates

Asia

• Market Update  Markets sold off as investors worry that the American government shutdown will continue longer than originally anticipated. 

Europe

• Market Update Most markets rallied in Asia, fueled by strong ISM manufacturing data in the US. Japanese equities sold off, dropping 2.3%, as new policy measures weigh on investors and the yen rises against the dollar.