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Goldman Warns Political Risks Are Set To Surge

Tyler Durden's picture




 

Yesterday we hinted at the one 'uncertainty' that was anything but at record-lows; and it seems Goldman Sachs (who recently opined on what's at stake in the Midterms) agrees that after a period of relative calm, the US political environment looks likely to become more uncertain again. Recent developments have raised the prospect of renewed political tensions this fall. While they suggest the chance of another government shutdown is not high, the political environment has changed enough that the deadlines are likely to create real uncertainty, and an agreement may be reached only at the last minute. Crucially, if Republicans succeed in capturing the majority in the Senate following the November midterm elections, the routine around fiscal deadlines that markets have become accustomed to over the last few years may become more unpredictable (and may spill over into another debt limit debacle).

 

Polarization is worst than ever... among polticians...

 

and the people...

 

Prediction Markets suggest election outcome is a toss-up.

 

Today, online prediction markets show a roughly equal probability of a Republican controlled House and Senate (implied probability: 45%) as a maintaining of the status quo (implied probability: 40%), although these measures have shown significant volatility YTD. At the start of the year the implied probability of status quo was approximately 55% (Rep. House & Senate 37%), while less than two months ago the markets saw a higher likelihood of Republicans taking the Senate and maintaining control of the House (~55%).

 

Via Goldman Sachs,

Political Risks Are Likely to Rise Somewhat This Fall...

Following the government shutdown and debt limit debate in October 2013, the US domestic political environment has not been an important factor for markets so far this year. Policy uncertainty, as measured for example by the Economic Policy Uncertainty Index, is reasonably low, the debt limit was increased earlier this year with little fanfare, and the absence of any meaningful deadlines since then has diverted attention from Washington. However, domestic political tensions seem likely to come back into focus a bit over the next several months.

Some of this has to do with the recent defeat of House Majority Leader Eric Cantor in the Republican primary election held in Virginia on June 10. This was notable because primary losses among incumbents are rare; they are even more uncommon among members of congressional leadership. Following the change in leadership, there has already been a shift in the stance that House Republican leaders are taking on certain items on the policy agenda for the next few months. There are three areas where Congress faces near term deadlines:

Export-Import Bank: The Ex-Im Bank provides roughly $30 billion annually in credit and credit guarantees to facilitate US exports, particularly for aircraft and energy- and industrial-related equipment. The bank’s authority to provide new export financing expires September 30, 2014. Congress typically extends this once every few years, and although House Republican leaders had until recently been supportive of renewing the bank’s authority, the new leadership team has indicated they prefer to let the Ex-Im Bank’s authorization expire. Democrats in both chambers of Congress are broadly supportive of the extension, while Senate Republicans appear to be looking for a middle ground.

 

Highway Bill: The federal highway program is financed out of a trust fund that takes in gasoline taxes, which are used to make payments to state governments for public transportation infrastructure projects. The highway program actually faces two deadlines: first, the program expires September 30 and must be renewed before then. However, Congress will probably need to act even sooner: gasoline taxes have not kept up with spending and the fund is expected to be depleted by August. To avoid disruption through year-end, Congress will need to transfer around $10bn from another source. However, lawmakers have not yet agreed, in either chamber, on how to finance this and time is running short. The Department of Transportation has indicated it may begin to delay payments to states for infrastructure projects if the situation has not been addressed by late July. In similar situations in the past, states have pulled back somewhat on construction spending as a result of the uncertainty, and could do so again if the issue is not resolved soon.

 

Spending Authority/Continuing Resolution: Congress must once again renew “discretionary” spending authority—i.e., spending on government operations, including defense, but excluding entitlement and credit programs—before it expires at the end of the current fiscal year on September 30. The top-line spending level was already negotiated as part of the agreement in late 2013 to partially reverse sequestration, so the debate now hinges mainly on the distribution of that spending and, more importantly, on disagreements on extraneous issues.

While allowing any of these three items to lapse would be somewhat disruptive, the key concern is enactment of a continuing resolution before September 30, to avoid another government shutdown. Until recently, this did not appear to be much of a possibility, but the growing dispute over the Ex-Im bank has raised the risk somewhat. In particular, there is a risk that several of these issues could be rolled together, forcing a single vote on all of them. Our best guess is that Congress will avoid a shutdown, either by allowing a shortterm extension of all three measures, or reaching some other arrangement that at least allows short-term extension of spending authority. That said, there appears to be a good chance that the decision will be left until the last minute in late September, which could lead to some renewed uncertainty ahead of the deadline.

Following the November election, Congress is likely to return for a “lame-duck” session before year end, to wrap up work on a number of deadline-driven items. This may include action in the areas noted above, along with a few other measures such as the extension of mainly corporate tax incentives that expired at the start of 2014. However, we don’t expect any significant policy changes.

...And Could Rise a Bit Further Next Year

The more important test will come in 2015, once the election result has taken hold. Our expectations for major policy changes over the next couple of years have been low because divided government is likely to persist under any of the likely election outcomes. That said, the form of divided government could potentially change.

Most observers do not expect the majority in the House of Representatives to shift, but the Senate appears much more competitive. For example, online prediction markets imply only a 5% or so chance that Democrats will gain the House majority, but slightly better than a 50% chance that Republicans will win the majority in the Senate. With 45 seats currently, Republicans need to win six seats to gain the Senate majority. At the moment, Republican candidates lead by double digits in three seats held by Senate Democrats, while another six Democratic and two Republican seats are essentially even in the polls. Depending on the outcome on November 4, the uncertainty regarding the Senate outcome could last beyond November. Two states with nearly even Senate races — Louisiana and Georgia — must hold a runoff election if no single candidate reaches 50% of the vote in November. Those elections would be held in December 2014 and January 2015 respectively.

The main domestic political risk for markets in 2015 seems likely to be the debt limit once again. Congress suspended the debt limit earlier this year until March 15, 2015. Similar to previous extensions, once the limit is reinstated it will be increased by the amount of debt issued to pay obligations during the suspension. The Treasury will once again use a variety of “extraordinary measures” to extend its borrowing capacity, which should allow operation under the debt limit until at least August and probably October before borrowing authority becomes constrained. If tax receipts are particularly strong, an increase might not be necessary until later in Q4 (Exhibit 2).

Over the last few years, the various fiscal debates that have at times proved disruptive to markets—debt limit deadlines, the government shutdown, sequestration, and the “fiscal cliff”—have all taken place with a Republican House and Democratic Senate. If the status quo prevails following the midterm election, the next debt limit may pose some risk but most market participants are now better able, we think, to anticipate the path to eventual agreement. This usually involves the House passing a measure with mostly Republican votes, the Senate passing a different measure with votes from both parties and the House then passing that bill shortly before the deadline, often with at least as many Democratic votes as Republican ones.

However, if Republicans win control of the Senate, markets will probably need to adjust to a new routine. In a scenario where Republicans hold majorities in both chambers, one possibility would be use of the budget “reconciliation” process to pass a debt limit increase coupled with other Republican priorities. Since only 51 votes are needed to pass legislation under this process, rather than the 60 votes often required in the Senate, this could in theory allow congressional Republicans to present the President with a debt limit increase, forcing him to either sign or veto it. While we have little doubt that the debt limit will be increased as necessary, this would add a new twist to what is already a potentially disruptive issue.

*  *  *

As Goldman concludes, this uncertainty is not priced in...

As the global election cycle begins to slow down... but with the President at the midpoint of his last term and policy uncertainty having abated (to a degree), we believe the market has not focused on what by all accounts looks like a toss-up in terms of Miterm election outcomes with no volatility being priced into the options market. To that end we focus on how a single-party Congress might impact the policy agenda and what needs to happen for that to occur.

 

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Sun, 06/29/2014 - 20:56 | 4908386 AccreditedEYE
AccreditedEYE's picture

Bet they're still leveraged 2- to-1 long.

Sun, 06/29/2014 - 21:42 | 4908467 knukles
knukles's picture

Political Risks, Again?
No...
The King has very nice clothes, than you, very much.

What have the boys got planned for us this time, hmmmm?

Sun, 06/29/2014 - 22:08 | 4908540 markmotive
Mon, 06/30/2014 - 00:51 | 4908796 0b1knob
0b1knob's picture

So it is Zerohedges position that:

 

 

1.) Both parties are the same.   RINOs or Demotards, no matter who you vote for the result will be the same.   Stability of the status quo.

2.) The two parites have never been farther apart.  This is risky and destabilizing. 

Mon, 06/30/2014 - 07:14 | 4909002 overmedicatedun...
overmedicatedundersexed's picture

ob1, 2 parites??but anyway..the big .gov program of NWO is doing fine, with bush wanting open borders gee so does obuma..coincidence you say..obuma care, gets funding by R lead house and D lead senate why another coincidence, massive spying and tsa thuggery (try flying) supported by both, wars both D and R supported our Iraq war, some d then cover by saying they were for it before they were against it..does any of this change your mind.

Mon, 06/30/2014 - 09:53 | 4909335 swmnguy
swmnguy's picture

That's an interesting synopsis, but I don't see the two points as being mutually contradictory.  Point #1 is the macro view.  Point #2 is the micro view.  This article is about Goldman and their forecasting.  In the larger sense, no matter which leg of the false duopoly gets the advantage, Goldman will remain firmly in the favored position over the long term.  The game, however, involves determining which party to bribe to gain short-term advantage.  That is a much more risky proposition.

Sun, 06/29/2014 - 22:11 | 4908536 Dr. Engali
Dr. Engali's picture

Only 2 -1, that's pretty conservative for somebody who has their tentacles wrapped so tight around the government.

Sun, 06/29/2014 - 20:59 | 4908397 TeamDepends
TeamDepends's picture

In Debt We Trust, All Others Seek God

Sun, 06/29/2014 - 21:08 | 4908404 Da Yooper
Da Yooper's picture

Remember

 

Money is THEIR God

Sun, 06/29/2014 - 21:15 | 4908411 Terminus C
Terminus C's picture

Money is the idol of their god, not the god itself.

Sun, 06/29/2014 - 21:16 | 4908414 TeamDepends
TeamDepends's picture

Um, are you being "too moderate"?

Sun, 06/29/2014 - 21:58 | 4908510 Da Yooper
Da Yooper's picture

 

You put my thoughts to words better than I could


Sun, 06/29/2014 - 21:12 | 4908410 WTFUD
WTFUD's picture

GS/JPM Declare Global Caliphate; Nail Gun 12 Mid level Bankers to Death for being TOO Soft and/or ready to spill the beans.

Sun, 06/29/2014 - 21:22 | 4908423 Reaper
Reaper's picture

What Goldman wants is good for who? Why increase the debt, the Fed can print for Congress to spend, while pushing up the market at the same time. Let the good times for Goldman roll on. If the sheeple believe and trust, what could go wrong?

Sun, 06/29/2014 - 21:30 | 4908439 Jackagain
Jackagain's picture

My guess is they just made a big bet on oil...and maybe gold. Rotten scum....

Mon, 06/30/2014 - 00:45 | 4908789 saveandsound
saveandsound's picture

If oil goes up, world-economy is going to plunge.

So that would last just a short period of time. I don't know about gold, but I assume it's price is going to stay where it is for a while. The only way it could come down would imply a gradual (or sudden ;-) ) disappearing of our monetary and fiscal problems. 

Sun, 06/29/2014 - 21:34 | 4908453 holdbuysell
holdbuysell's picture

BFD. Maybe the sock puppet moves from the left hand to the right.

Nothing will change where it really matters:

1) Monetary policy: end the fed and bring the control of the money back to the people and out of the control of a private for-profit banking cartel

2) Fiscal policy: stop spending more than you earn through taxes, and

3) Foreign policy: stop exploiting other resource rich countries through wars of choice

Sun, 06/29/2014 - 22:02 | 4908488 Dr. Engali
Dr. Engali's picture

Meh, remind me again how Washington is any different with the republican'ts in the majority......... Is that crickets I hear? Let's see where the two parties differ: they both suck banker cock, both want amnesty, both feed the MIC, both spend more, tax more, borrow more, both promote the welfare state (corporate and general population), both sold out the country to the globalists, both parties are doing a fine job at destroying the constitution........ I just can't find a bit of difference between the demicans and the republicrats other than one wants to regulate with whom you sleep and the other wants to regulate what you eat.

Sun, 06/29/2014 - 22:23 | 4908565 Tulpa
Tulpa's picture

There's still a pulse of liberty and limited govt within the GOP, despite the Bushites doing their utmost to destroy it.  The TP is certainly on its last legs in the GOP but you won't find anything remotely comparable among the Dems.

Sun, 06/29/2014 - 22:29 | 4908576 Dr. Engali
Dr. Engali's picture

Hah, there is no pulse of liberty, nor limited government left in the republican party. If it wasn't for activest pressure they would roll over on every issue just as easily as the did on the debt ceiling debates. They are all statists, and the only thing that matters to statists in more power.

Sun, 06/29/2014 - 22:02 | 4908522 Cabreado
Cabreado's picture

The interesting but expected part is that a culture that is GS, et al has no idea how it continues to expose itself.

Things are getting dicey... and self-exposure is guaranteed... where there is control as a lifestyle, there is no control over self-exposure, when things start to crumble.

Sun, 06/29/2014 - 22:21 | 4908559 Tulpa
Tulpa's picture

Oh please it's very predictable.  Rove, McConnell, and the US Chamber of Cronyism will stop at nothing to squash any GOP candidate that questions continuing the federal spending binge, as seen in the MS primary.  There's ZERO danger of a shutdown or sequester or whatever.  And that's assuming the TP doesn't give the GOP establishment the finger and stay home this Nov.

Sun, 06/29/2014 - 23:04 | 4908668 teslaberry
teslaberry's picture

the one hope we have is that republicans might try to crash the economy before 2016 election season to help cement their victory. 

if they do that, it could work out very nicely. 

Mon, 06/30/2014 - 07:38 | 4909042 MilwaukeeMark
MilwaukeeMark's picture

And the resulting riots in the streets when EBT cards and Obama phones quit working has TPTB taking a play from the Nazi 1933 Reichstag playbook, suspending elections, shutting down the opposition press and confiscating guns. All for our own good.

Sun, 06/29/2014 - 23:10 | 4908682 Joebloinvestor
Joebloinvestor's picture

You can fucking bet that the fed is gonna withhold payment or make it mandatory that part be spent on housing for illegals.

Mon, 06/30/2014 - 07:26 | 4909025 intric8
intric8's picture

Thats EXACTLY where much of our hard-earned dollars have gone - the dems blow it on supporting sovereignty-wrecking policies that benefit illegal filth to water down the votes of real americans, all to ensure they stay in power for the next 50 years. fuck

Sun, 06/29/2014 - 23:15 | 4908694 BeetleBailey
BeetleBailey's picture

Hmmm....here's what I think.....

 

FUCK GOLDMAN SACHS

Mon, 06/30/2014 - 01:12 | 4908813 Schmuck Raker
Schmuck Raker's picture

"GOLDMAN Warns Political Risks Are Set To Surge"

Sooooo.........we don't have to worry about any surge of political risks?

Mon, 06/30/2014 - 02:47 | 4908877 Nehweh Gahnin
Nehweh Gahnin's picture

And so Goldman kicks off the earliest Xmas shopping season ever ... and in YOUR stocking, Johnny, is one harrowing and yet riveting political distraction.

Mon, 06/30/2014 - 07:12 | 4908997 intric8
intric8's picture

No matter which way it swings, the taxpayer will be subsidizing the status quo one way or the other, ie looted, while we continue to be stuck in the same, useless, right-left paradigm meant to distract us in the first place

Mon, 06/30/2014 - 07:37 | 4909038 NOZZLE
NOZZLE's picture

Political Risks?  if the guy who runs Switzerland opened up the borders to plane loads of Albanians, Turks and other diseased  uncivilized third world scum, the citizens would have dragged him out of his Chalet and summarily executed h8m.

Mon, 06/30/2014 - 08:15 | 4909095 MFL8240
MFL8240's picture
Goldman Warns Political Risks Are Set To Surge

 

By design by the family of Rothchild!

Mon, 06/30/2014 - 09:07 | 4909212 d edwards
d edwards's picture

If you read between the lines just a little, it seems that the GS banksters are most worried about how a change in DC would affect THEM and THEIR considerable influence on the gov't.

 

Since when is trying to bring and out-of-control 0bamao regime back under control a bad thing?

Mon, 06/30/2014 - 10:43 | 4909471 highwaytoserfdom
highwaytoserfdom's picture

Ex-Im Bank,NAFTA, ISIS.  the military indistrial, banking cabal are a little bit edgy on well informed public..  

Mon, 06/30/2014 - 10:44 | 4909475 gcjohns1971
gcjohns1971's picture

Oh, I see...

The parties are moving away from one another.

And I see from the chart that it is the conservatives becoming more conservative.

That's why they now support nationalized health care.

Because they are more conservative?

Uncontrolled immigration combined with unlimited welfare spending?

TARP?  TALF??  QE??

Patriot act? wholesale dismissal of the bill of rights?

This is 'Conservatism"????  By what definition?

The problem with such articles is that they intentionally deceive. 

The central theme of the article is that there are political risks due to increasing extremism from the Republicans, and Republicans will likely gain power in the upcoming election.

But what is Conservative, and what is Liberal?  Isn't a definition needed in order to understand why this is a "Risk" relative to the DISASTER we have today????  Yet it is totally undefined in the article.

We are left with the idea that this is risk be case "Liberal" = Good and "Conservative" = Bad.  But why is that so?

Once upon a time the government had to follow at least the main parts of the Constitution and the Bill of Rights.  Since that is no longer so, then by that definition a truly conservative position would be that if the government doesn't follow the law, then it is not the government.  

Who wants police planting evidence, or worse just declaring they found it, when they in fact found nothing?  Is that a "Conservative" position?  Or a "Liberal" position?  Once upon a time when "Liberal" meant one who favored Liberty, this was a Liberal position.

What do these terms mean????

They've been twisted, formed, and even inverted to such degree that any position can be either Conservative, or Liberal at any given moment, and switch on a moments notice.

Every concrete policy change I listed would  have at any other time in my life be defined as of the Left.  Yet now that Republicans are doing these things too, the Republicans are increasingly conservative???????

ANSWER:  The term "Conservative" and the term "Liberal' no longer mean anything.  Saying that a particular person, party or policy,  is becoming more one or the other is totally meaningless.  Calling the undefined a "Political Risk" is also totally meaningless.

This article is totally meaningless, but meant to stimulate fear.

And it works.  It stimulates fear for humanity in the absence of brain enough to know they've been told nothing.

 

Mon, 06/30/2014 - 11:08 | 4909555 PiratePiggy
PiratePiggy's picture

"Highway Bill" - there is a misnomer.  Much of it is to subsidise public transportation, bike paths, and sound barriers that make it harder to see the road today or expand the road in the future.

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