If Congress can’t get a budget deal soon, then we may see the government shut down at least temporarily starting October 1.
“If we have insufficient cash on hand, it would be impossible for the United States of America to meet all of its obligations for the first time in our history,” wrote Lew.
“So far, investors have been complacent about the risks posed by the looming budget fight,” said Nouriel Roubini. “They believe that — as in the past — the fiscal showdown will end with a midnight compromise that avoids both default and a government shutdown.”
“But investors seem to underestimate how dysfunctional US national politics has become,” warned Roubini. “With a majority of the Republican Party on a jihad against government spending, fiscal explosions this autumn cannot be ruled out.”
“Little to no volatility premium is priced into the options market for the debt ceiling debates, in our view,” said Goldman Sachs’ Robert Boroujerdi noting the complacency. “S&P 500 put prices are near their lowest level since the financial crisis.”
Here’s a chart from Goldman Sachs’ Robert Boroujerdi showing how the S&P 500 traded before and after the last three incidents.
“While past performance is not an indicator of future results, we find these case studies useful,” he said.