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Here’s Why Wall Street Will Be Blind-Sided by Default

Here’s Why Wall Street Will Be Blind-Sided by Default

Anyone who has ever been the subject of ongoing bad press coverage knows the importance of riding out the news cycle. Despite all your efforts to pry yourself from the front pages, the only sure-fire way to get out of the headlines is for something bigger to come along and divert the media's attention.

In much the same fashion, the nation (and increasingly the world) are justifiably fixated on the stand-off in Washington, with the Dow Jones Industrials now down about 4.5% since hitting an all-time high three weeks ago in the aftermath of the Fed's September meeting.

Related: Default Talk Is Just a “Scare Tactic” Says Wesbury

Of course, until an agreement is signed and the debt ceiling officially raised, the default risk - however small - cannot be entirely eliminated. But in the meantime, many on Wall Street just can't be bothered worrying about it.

"I think the risk of ultimate default on U.S. debt is pretty remote," says Michael Cuggino, the president of Permanent Portfolio family of funds, in the attached video. As much as he, and most market watchers expect a repeat of the Congressional show-down of 2011, he says "the devil will be in the details" of the eventual agreement.

"It's an inconvenience at the moment, but I don't think it has any long term effect," he says.

One puzzling quirk of this month's saga is the sudden outperformance of the Nasdaq versus its peers, especially the Dow. While part of this can be explained by the fact that the tech-heavy index is light on lagging financials compared to the other large-cap indexes, Cuggino points to the appeal of smaller, more nimble, and faster growing companies have surged in a slow-growth environment as another reason for the disparity.

Related: Catastrophic Consequences of a U.S. Default Explained

While he clearly has an eye on the negotiations in Washington, Cuggino's mental energy is being expended in other places right now, such as the deluge of earnings that are about to be reported.

"We saw this movie before," he says of the 2011 fiscal fight that ultimately got resolved, the thought being that this one will too.

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