Yet here we are, with a huge disconnect ‘between DC and New York’
House Speaker Kevin McCarthy heads for the White House today for a meeting with President Joe Biden on the debt ceiling.
Photographer: Al Drago/BloombergLisa Abramowicz
Who blinks first?
Everyone hates the self-imposed crisis in Washington that seems to happen every few years with politicians haggling over raising the US debt limit. And yet elected officials are trying their best to get Wall Street interested — and involved in their game.
House Republicans and President Joe Biden are hurtling toward a debt-ceiling smashup, with each side betting the other will blink. Both camps seem to be counting on an investor tantrum pave the way for a face-saving compromise to dodge a default and blame markets for forcing their hands. That was the message from Surveillance guests ahead of today’s White House meeting between Biden and the top four leaders in Congress.
“The fact that we’re talking in Washington about needing markets, and Wall Street looking at Washington and saying, ‘you guys gotta do your job’ — it shows what a gap there is between DC and New York,” said Heidi Crebo-Rediker of International Capital Strategies. “It means that the system is obviously broken. It means that we’re also putting out this picture on the world stage of the United States as hugely dysfunctional and not a leader and steward of global markets and the global economy.”
Oppenheimer Asset Management’s John Stoltzfus said self-preservation would ultimately lead to a solution that avoids the US being unable to pay its obligations. “We believe it will be political suicide for anybody who takes the United States over the cliff into any kind of default.”
But his optimistic case relies on some kind of market pressure. He recalled that Warren Buffett helped Washington avoid a similar crisis years ago with televised warnings of catastrophe. Trouble is, House Speaker Kevin McCarthy’s fractious GOP caucus gives him little room to maneuver, and the White House is dug in. Will anyone listen to Wall Street’s cries if they’re not accompanied by real pain in markets?
“You now have this massive risk that has nothing to do with financial conditions but everything to do with politics,” said Kathryn Kaminski of AlphaSimplex Group.
The showdown over the debt limit won’t matter much in 12 to 24 months, PGIM Fixed Income’s Robert Tipp suggested. It’s the short term, he said, in which this duel is hugely important.
“You are going to see an increase in anxiety as the balances run low,” he said. “And if there is an accidental default, you will see a drop in stock prices, a drop in yields and a widening in credit spreads.”
At Morgan Stanley Wealth Management, Lisa Shalett is advising clients to focus on the particulars of the eventual deal. “It’s not a question of if, it’s a question of when and how.”
Taking talks to the 11th hour would drain the Treasury’s coffers, forcing Secretary Janet Yellen into heavy issuance later this year and squeezing liquidity just when Fed tightening may be hitting credit, Shalett said. And if the GOP forces Biden to pare some of his spending priorities, there are dangers there, too: “Those things have been the support to growth.”
A few (optimistic) words about banks
PacWest Bancorp, the latest problem child among regional US lenders, began the day by clattering lower. The ETF that tracks those banks has fallen for five of the past six trading sessions, and is down 36% this year. And the Fed’s Senior Loan Officer Opinion Survey — with that Sloos acronym that Tom pronounces with some unidentifiable accent — did show continued weakness yesterday.
With all this, Gerard Cassidy of RBC Capital Markets made a case for optimism about banks. While they’re proceeding cautiously, he said, that’s natural in a market where risks abound, not least of which is the Fed’s tightening.
“They’re not packing up their bags and not lending,” Cassidy said. “If they have real opportunities on a risk-adjusted basis, it makes sense to lend. they will lend.”
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