It is remarkable that such a powerful nation as the US can find itself in such a mess as it has for no better reason than political intransigence.
It is even more remarkable that the shutdown of central government over there has not had an even greater effect on markets. While the failure to reach a budget settlement has clearly weighed on sentiment, shares have not taken the caning that many expected.
Part of the reason is that we’ve been here before. While it has been 17 years since the last time a lack of agreement forced the closure of some central government functions, the fact remains that in a country where there are only two political parties that are fairly evenly matched so far as electoral support is concerned, such a situation is possible and can and does occur.
It makes you wonder if the Fed thought this might happen and delayed cutting back on its monetary easing programme just in case.
Some form of accommodation on the measures that have stalled the continuation agreement will have to be found if the US is not to default on its debts. Now that really would set the cat among the pigeons.
The problem remains that the Republicans want Obama’s healthcare reforms delayed, while the Democrats don’t. Perhaps by now a few heads have been knocked together and it’s back to business as usual, but as I write this, the US is into the third day of stalemate.
It has all rather taken attention away from other events worthy of remark. Economic indicators coming out of China have been steadily improving, while Europe managed to avoid a further crisis as the withdrawal of Berlusconi’s ministers from the Italian coalition government failed to trigger a further general election.
Even economic signs coming out of Europe have been on the up. Indeed, were it not for the US impasse, we might have been seeing equity markets testing recent highs.
We have even seen the rise in yields on both sides of the Atlantic reverse a little. In part this reflects a return to the “risk off” approach to investing, encouraged by the impasse in the US, but the fact that inflationary pressures appear muted still has helped.
The one place where prices do seem to be buoyant is residential housing – particularly in the US, though house prices continue to creep up at home, even if last week’s Halifax survey painted a mixed picture.
There are deeply divided opinions as to whether housing should be viewed as a financial asset or if it should be considered more as part of our social fabric.
Certainly, buy to let investing has been growing in popularity, partly because other financial assets have had such a difficult time of it over recent years. With several recent fund launches aimed at widening the accessibility of residential property, this looks an interesting topic to revisit.
In the meantime, investors await the outcome of discussions in Washington. The worry is that a prolonged disagreement could have adverse consequences for the economic recovery over there.
Whether this is a valid concern is unclear, but it seems as though markets are likely to remain on hold until a budget agreement is reached. With corporate news continuing to generally surprise on the upside, perhaps we should be viewing this as more of an opportunity than a threat.
I still find it difficult to understand how the US can allow such a sorry state of affairs to persist.
Brian Tora is an associate with investment managers JM Finn & Co