The markets are complacent and are ascribing a near-zero possibility of a technical default -- that is, missing part or all of the mandatory spending (Medicare, Social Security, etc.) but paying interest on the government's debt while maturing debt is rolled over. By contrast, I don't see the possibility of an adverse outcome as trivial. On Sunday, Boehner reported that the House will not pass a clean debt-ceiling bill. At the same time, Obama has stated he will only sign a clean bill. That is what we call a standoff. While I continue to view the baseline case as an Oct.16-Oct. 17 compromise, the odds of a technical default are at least one in three. (Note: It is increasingly clear that prioritizing payments is difficult after the Oct. 17 deadline, as Treasury payments are programmed day by day and not by recipient.) This is an uncomfortably high possibility relative to what the markets appear to be pricing in. Here are my four basic concerns: 1. The Republican Party remains polarized and dysfunctional. 2. The Democratic Party remains uncompromising of view. 3. My contacts in Washington, D.C., continually tell me that there are little signs of movement (even under the surface) in dealing with the shutdown and debt-ceiling issue. (As I wrote, the two issues have merged as one.) In canvassing some of these contacts over the weekend, they used words like "immovable," "chaotic," "challenging" and "hostile." If you talk to the participants in the process, as opposed to the bookies betting on them in the marketplace, they are surprised that the capital markets have been as calm as they have. The dynamics of a compromise remain complex, and the pathway to that compromise, according to the central players (who understand the forces at work), is still not clear or under control. 4. Both the Democrats and Republicans appear incapable of dealing with each other. If anything, their hostility is growing stronger. As I have continually opined, now is not the time to be over one's skis, either long or short. It is a period to have above-average cash reserves, and it is an excellent time to watch how things sort themselves out, particularly considering how far the market has advanced.
"We are not going to pass a clean debt limit.... The votes are not in the House to pass a clean debt limit."
-- Speaker John Boehner, ABC's "This Week With George Stephanopoulos"
"The U.S. is on the verge of going somewhere we've never been if Congress fails to raise debt ceiling."
-- Treasury Secretary Jack Lew, NBC's "Meet the Press"
Kass: Complacency Rules the Market
Oct 07, 2013 | 02:30 PM EDT
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV