It’s a common Wall Street cliché: Investors don’t like uncertainty.
It’s a common Wall Street cliché: Investors don’t like uncertainty.
We will never know what would have happened if Bear Stearns hadn’t been sold. We will never know what would have happened if AIG had failed. Experts say the financial system as we know it could have collapsed.
That threat – that so-called uncertainty — was enough for the economy and stock market to nosedive into the worst economic crisis since the Great Depression.
Flash forward to the current debt ceiling debate. And let’s be honest, concerns over the government shutdown do not even compare to the debt ceiling. Economists, analysts, pundits all are preaching Armageddon: If the U.S. doesn’t pay its bills, the system could collapse.
Pure chaos. Dogs and Cats living together a la Ghostbusters.
Missing a federal debt payment would be a bad thing. Even if it’s not a total “default,” even delayed payments could lead to credit downgrades, increased borrowing costs and an economic slowdown.
However, as some have argued, it could just as easily be a non-event. If we’re a few days late, it’s just like being late on a mortgage or car payment – probably nothing happens or, perhaps, there’s a finance charge.
That debate, though, does not matter.
Why?
Because what would happen is an unknown. That unknown translates into uncertainty, which leads to bad things for our still-fragile economy.
If the debt ceiling is not raised, and the U.S. misses a payment, almost assuredly, it will engender fear in the markets, whether those fears are unfounded or not.
That’s why CEOs from the business world were eager to meet with President Obama this week. The message: If uncertainty reigns, yes, corporate America will profit less, but political America will be hurt just as much if the economy slows and even flirts with, dare we say, recession.
So far, the market response has been negative but muted. The stock market has expressed concern but not fear. Investors have done so well in the last few months and years and so a lot of people are simply taking profits at a logical spot. The recent sell-off takes us about 5% from all-time highs, but there is no panic selling.
The money from selling stocks seems to be rotating into the bond market. It’s supposedly safe and secure. What is most concerning for the investment community right now: The cost to insure those bonds has risen in recent days, once again bringing the dreaded “credit default swaps” back into the conversation. It’s enough to bring on a cold-sweat flashback to 2008.
Again, the market moves are not dramatic, yet. That is the key. We do not know how things will progress as we inch toward the Oct. 17 deadline for hitting our borrowing limit and risking default.
The taking-profit mentality could transition into the raising-cash mindset. That’s when investors sell irrationally. People want cash in case something really bad happens. Then, that money sits under the metaphorical mattress and does not circulate through the economy. That slows growth, dents confidence further … and leads to macro-economic problems.
Couple that scenario with the potential for higher borrowing costs and potentially frozen credit markets and you will see why even a legitimate threat of a missed debt payment by the federal government – even if it’s not a “default” — has elicited some apocalyptic talk from economists.