Ok, I logged into TMC today to write something up on this issue, but I dipped into the short term investors thread and saw that some folks have already been discussing this issue. Still, its a major issue that probably deserves it's own thread.
First of all, lets be clear. A traditional government shutdown (just like grandma used to make) is all but inevitable now. Ted Cruz and Mike Lee are coordinating with strong Tea Party minded conservatives in the House to engineer a shutdown, and today leadership (Boehner, et.al.) stepped out of the way and agreed to another CR with an Obamacare defund component.
Near Term Volatility
What's important to realize from a calendar standpoint is that the only way for the Senate to act on this new CR would be with unanimous consent, and Cruz has already indicated that he will block it unless the Democrats agree to accept the new CR in toto. This will not happen, so the Senate will not even be able to vote on the measure before the government shuts down on Tuesday.
I don't possess a crystal ball, but it seems to me that there is a strong risk of downside volatility on Monday/Tuesday after the market has had a chance to digest today's news and come to the conclusion that a shutdown is now inevitable. Once it does that, it will also need to reckon with how far apart the parties are and start pricing in the possibility that the shutdown could be extended and have real impacts on the economy. Furthermore, there has been some question as to whether Republicans will agree to pay back pay to Federal workers when this is all concluded, which could cause this shutdown to be more damaging than past ones.
Will They Hold the Line?
Moving past the immediate effects on Monday and Tuesday, if either party does not blink the next event that might force action will be on October 15th when paychecks for members of the military (and other employees) will be delayed if the situation is not resolved. If both sides are still holding firm at this point, the risk of catastrophe will go up rather dramatically because we'll be hard up against the parallel debt limit deadline which is October 17th.
From some friends of mine who are Democratic staffers on the Hill, I've been hearing that Democrats are hoping to force mainstream Republicans to pass a clean CR and debt limit increase by the 15th, and will be applying pressure in the media centered around that date as a point of decision. Their expectation is that Republicans who aren't committed to Cruz, but who don't want to be seen blocking this initial shutdown strategy, will side with Democrats under the cover of the need to pay troops who are still fighting in Afghanistan.
If Democrats adopt this media strategy, expectations in the investment community for a resolution by the 15th will also start to build. So if there isn't an agreement by the 15th, and if the market has managed to stay steady in the face of the shutdown, a non-agreement by the 15th seems also certain to cause a big move downwards in the face of a potential default on the 18th that will start to seem very real.
Is it Time to Buy a Gun?
In the unfortunate event that there is not an agreement by the 18th, the U.S. seems highly likely to begin defaulting on obligations, though the expectation (which is more of a hope than a reality) is that the Treasury will be able to prioritize some of the 100 million+ payments that they make every month so that they are able to continue servicing bond holders and important constituencies. This would still be a technical default, and the reality of the situation is that many, many contractors of various types would not get paid.
The loss to the real economy would be equivalent to ~4% of GDP, just in terms of hard cash that will stop flowing. The potential chaos in financial markets, or the potential for particularly severe multipliers as consumers react to the mess and pull back represent a huge steaming pile of question marks that nobody has the answer to.
An important issue that I have yet to see be addressed by anyone in the media is whether a government shutdown right now might actually push back the date when the we default. The October 17th date is obviously based on the notion that the government is operating normally, but I'm pretty sure that if the discretionary side of the government is shut down on the 1st, that could add several days, or even a week, to the timeline that has been discussed by the Treasury.
It's not clear to me that the media will clue into this unless one side (or both) decide to advertise the fact that a shutdown will push back the drop dead date. Or I could just be wrong, and a shutdown will not produce "savings" that would delay a default. Still, my guess is that there is fairly substantial wiggle room around the 17th in the case of a shutdown (in fact there is probably a bit of wiggle room even in the current estimate). Still, even an extra week is not a lot of time.
What about TSLA?
These are all just meta-level events that will have little impact on Tesla until we get to the point where we have to start dusting off our "How to Cook A Human" recipes. If the real economy ends up being damaged enough to affect sales of the Model S, our portfolios will have long since gone into a state of free-fall.
So the risk for TSLA carnage is all in the near term, starting Monday and accelerating as we approach the debt ceiling on the 17th. I strongly suggest you think hard and this weekend about what your strategy is going forward, but for my part I've already positioned myself to take advantage of a big move down.
First of all, lets be clear. A traditional government shutdown (just like grandma used to make) is all but inevitable now. Ted Cruz and Mike Lee are coordinating with strong Tea Party minded conservatives in the House to engineer a shutdown, and today leadership (Boehner, et.al.) stepped out of the way and agreed to another CR with an Obamacare defund component.
Near Term Volatility
What's important to realize from a calendar standpoint is that the only way for the Senate to act on this new CR would be with unanimous consent, and Cruz has already indicated that he will block it unless the Democrats agree to accept the new CR in toto. This will not happen, so the Senate will not even be able to vote on the measure before the government shuts down on Tuesday.
I don't possess a crystal ball, but it seems to me that there is a strong risk of downside volatility on Monday/Tuesday after the market has had a chance to digest today's news and come to the conclusion that a shutdown is now inevitable. Once it does that, it will also need to reckon with how far apart the parties are and start pricing in the possibility that the shutdown could be extended and have real impacts on the economy. Furthermore, there has been some question as to whether Republicans will agree to pay back pay to Federal workers when this is all concluded, which could cause this shutdown to be more damaging than past ones.
Will They Hold the Line?
Moving past the immediate effects on Monday and Tuesday, if either party does not blink the next event that might force action will be on October 15th when paychecks for members of the military (and other employees) will be delayed if the situation is not resolved. If both sides are still holding firm at this point, the risk of catastrophe will go up rather dramatically because we'll be hard up against the parallel debt limit deadline which is October 17th.
From some friends of mine who are Democratic staffers on the Hill, I've been hearing that Democrats are hoping to force mainstream Republicans to pass a clean CR and debt limit increase by the 15th, and will be applying pressure in the media centered around that date as a point of decision. Their expectation is that Republicans who aren't committed to Cruz, but who don't want to be seen blocking this initial shutdown strategy, will side with Democrats under the cover of the need to pay troops who are still fighting in Afghanistan.
If Democrats adopt this media strategy, expectations in the investment community for a resolution by the 15th will also start to build. So if there isn't an agreement by the 15th, and if the market has managed to stay steady in the face of the shutdown, a non-agreement by the 15th seems also certain to cause a big move downwards in the face of a potential default on the 18th that will start to seem very real.
Is it Time to Buy a Gun?
In the unfortunate event that there is not an agreement by the 18th, the U.S. seems highly likely to begin defaulting on obligations, though the expectation (which is more of a hope than a reality) is that the Treasury will be able to prioritize some of the 100 million+ payments that they make every month so that they are able to continue servicing bond holders and important constituencies. This would still be a technical default, and the reality of the situation is that many, many contractors of various types would not get paid.
The loss to the real economy would be equivalent to ~4% of GDP, just in terms of hard cash that will stop flowing. The potential chaos in financial markets, or the potential for particularly severe multipliers as consumers react to the mess and pull back represent a huge steaming pile of question marks that nobody has the answer to.
An important issue that I have yet to see be addressed by anyone in the media is whether a government shutdown right now might actually push back the date when the we default. The October 17th date is obviously based on the notion that the government is operating normally, but I'm pretty sure that if the discretionary side of the government is shut down on the 1st, that could add several days, or even a week, to the timeline that has been discussed by the Treasury.
It's not clear to me that the media will clue into this unless one side (or both) decide to advertise the fact that a shutdown will push back the drop dead date. Or I could just be wrong, and a shutdown will not produce "savings" that would delay a default. Still, my guess is that there is fairly substantial wiggle room around the 17th in the case of a shutdown (in fact there is probably a bit of wiggle room even in the current estimate). Still, even an extra week is not a lot of time.
What about TSLA?
These are all just meta-level events that will have little impact on Tesla until we get to the point where we have to start dusting off our "How to Cook A Human" recipes. If the real economy ends up being damaged enough to affect sales of the Model S, our portfolios will have long since gone into a state of free-fall.
So the risk for TSLA carnage is all in the near term, starting Monday and accelerating as we approach the debt ceiling on the 17th. I strongly suggest you think hard and this weekend about what your strategy is going forward, but for my part I've already positioned myself to take advantage of a big move down.
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