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Today might be the day that debt ceiling concerns — which have been most accutely felt in Washington, but which have been mostly ignored by Wall Street — actually start breaking their way through into the minds of market participants.
In a note to clients, DC-based research firm Potomac Research Group writes: "A Genuine Crisis Looms for the Markets on Debt Ceiling."
MEANWHILE, A MUCH BIGGER CRISIS LOOMS: Treasury Secretary Jack Lew had a chilling message yesterday: the government may have only $50 billion in cash on hand by mid-October; inflows and outflows sometimes exceed that amount every day. This is a looming train wreck; a government shut-down, on the other hand, wouldn't affect much that's essential, and the public would hardly notice a brief shut-down.
THE DEFAULT THREAT: It's still a very low probability, but that probability is not zero. As we wrote on Monday, if a default is imminent, we think President Obama would raise the debt ceiling by executive fiat. But the chaos at Treasury leading up to such a crisis could result in some very scary headlines regarding Social Security checks, paying the troops, paying government vendors, etc. This could become a headwind for the economy, as the FOMC undoubtedly concluded last week.
They conclude that for this crisis to end, there might need to be a severe market reaction. Only then, perhaps, will someone blink.
You can read here for our rundown of the argument that the market is being too ignorant about the risk of the debt ceiling on markets.
The gist is basically this: The White House has said it won't negotiate on the issue. The GOP has no appetite for a clean raise. And the growing Democratic left will hem in The White House, preventing any possible deal. There's just no basis for a deal, nor is there one being worked out in the background.
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