The US government will probably partially shutdown tonight, which as such isn’t that bad for a short while, but Congress seems set for a conflict about the debt ceiling, which could be really bad if they really defaulted, however pointless a technicality it is.
The market is basically pricing in a deal and hasn’t panicked yet. There will probably be a deal in the end, but I feel it does require a market panic (at least a small short one) to progress. I see things (possibly) happening that way:
- Markets stay calm for a few more days, while the deadline approaches
- The calm markets reinforce radical Republicans’ intransigence
- The market panics more convincingly (via volatility and/or actual dollar/stock falls) when a significant deadline gets too dangerously close
- Radical Republicans see the market panic in their brokerage account and surrender in a disorderly manner
- Problem solved, markets come back to where they are now, after a few days or at most a couple of weeks
The logic of the institutions seems to imply this, along with Obama being a much better strategist than radical Republicans — I don’t see why he would surrender first. That way he gets his way on the healthcare reforms, and scores political points in the process.
This is eerily like the Eurozone, without the structural reasons. Not silly at all.
Disclosure: long VIX, VSTOXX via derivatives.