US Shutdown: Obamacare and the fear of Republicans

The US government has shut down 17 times before. The worst was in 1995 and the market only dropped 3%. So, a government shutdown is not seen as a market moving event. Failure to raise the debt ceiling, which allows the government to keep borrowing and potentially avoid default, is another matter

What is going on in the US? Has the entire government lost their minds? Not only is the government shut down, but there is a remote possibility that the US will default on its debts. How has this possibly happened? But what is more interesting is why hasn’t the market reacted more dramatically?


Leader from Barak Obama to the Christine Lagarde, the head of the International Monetary Fund (IMF), have predicted a catastrophic melt down and no one seems to care. The US market is down only 2.5% from its all time high. Is it simply more political theatre like what just happened in Italy or is there a real possibility that the US could go over the cliff and take everyone else with it?


One reason that markets are so calm is that they have been through this before. The US government has shut down 17 times before. The worst was in 1995 and the market only dropped 3%. So a government shutdown is not seen as a market moving event. Failure to raise the debt ceiling, which allows the government to keep borrowing and potentially avoid default, is another matter. But the markets also have experience with a debt ceiling battle. On 2 August of 2011, the US was supposed to run out of money. But on 31st July, President Obama and the leader of the Republicans announced that they had an agreement raising the debt ceiling and the law was enacted by the 2nd August deadline. But it didn’t help the market, which plunged 20%. Still even that trauma was short lived. By March of 2012 the market had reached new highs.


But is this time different? Possibly. The difference is the basis of the dispute. In 2011, it was all about money. The solution was the supposedly dreaded austerity package known as the Sequestration, which since has gone into effect without much fanfare. This time it is about the signature achievement of President Obama, a program of universal health care known as Obamacare. You normally can reach a deal with money, but getting rid of a law passed by Congress and approved by the Supreme Court is impossible, unless you have the votes. The Republicans don’t have, at least in the Senate.


The difficulty of repealing Obamacare has not stopped the Republicans from trying. The lower house, the House of Representatives, which is controlled by the Republicans, has voted over 40 times to repeal the law. The repeal always dies in the Democrat controlled Senate. Even if repeal did get through Congress, it is the signature achievement of the President and he would veto it.


The reason why Obamacare is so important is that it was the reason why so many Republican got elected. Conservatives hate it. There are 435 seats in the House. The Republicans have 232 or 53%. The last time the government shut down, the Republicans also had a majority in the house, but then many of its members were from marginal districts. The success of the Republicans in the state legislatures has allowed them to redraw the voting districts.


The new districts are very safe for Republicans. Republican districts are overwhelmingly white and rural. The voters of a Republican Congressman are 72% white compared to 52% their Democrat colleagues. A Democratic district is usually urban with a population density of 4,385 people per square mile. Republican districts only have 567 per square mile. These white rural districts are very conservative. They are dead set against two things: government spending and Obamacare. So they vote in conservative Congressmen who win with bullet proof margins. 204 or almost 88% of the present Republicans won by margins of more than 10%, over 60% won with margins better than 20%. They are also new to their jobs. About half of the Republican Congressmen have less than three years experience and 30% less than two. They haven’t been in long enough to be subject to normal political pressure. So as long as these legislators do everything possible to cut government spending and kill Obamacare they have no fear of being re-elected.


The result is that the normal fear that a legislator might feel by following an unpopular policy is simply not there. These people will not suffer any consequences if they shut down the government. It will take weeks for anyone but a government employee to actually notice. Most of their constituents will hardly complain during the next two weeks left before the money runs out. On the contrary, they are cheering them on. So their incentives are just the reverse of what one might expect. So the odds are quite favourable that the Republicans will take this fight to extremes.


In such an environment one would think that the market would be plummeting. Quite the reverse. As I write this on Friday, 4th October, the market is actually up slightly. The four days of government shut down has hardly affected markets at all. Why are they so complacent? The easy answer is that they are always complacent.


When Lehman Brothers collapsed in 2008, there were far too many articles on so called ‘Black Swans’. In other words, the stock market collapse could not be foreseen because it was a rare event. This is simply foolish. Lehman’s collapse was forewarned by the collapse of another brokerage, Bear Sterns. By September, the stock markets had been falling for 11 months and the housing market for over a year.


European markets were theoretically surprised by the sovereign debt crisis in the summer of 2011. But there was plenty of warning. Greece had had problems for over year. Presently there are plenty of enormous risks that are not priced in. For example, problems with the deteriorating municipal bond market in the US. China’s corporate and household credit has risen from 120% to 170% in five years a level reached in the US in 2008. China has a massive housing bubble and Japan a massive sovereign debt. Other emerging markets are swimming in huge levels of consumer and corporate debt while their currencies continue to deteriorate.


It is not that markets do not know about these risks. They are more than aware of them. It is just that the market participants do not adjust their expectations to perceived extreme risks because it is expensive to do so. Hedging with options is expensive and if the risk does not materialize they can expire worthless. If you act too soon, your competitors who took greater risks may come out on top. This is especially true for political dramas as we just witnessed in Italy.


(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)


Options for debt investment: Moneylife Foundation Fixed Income

Moneylife Foundation held an exclusive, in-depth session which delved into different options for fixed income investments. Each investment option was discussed in detail for its advantages and disadvantages

Moneylife Foundation hosted its 184th seminar with the event titled “High Returns, Safe Capital” conducted by Debashis Basu, editor, Moneylife and Raj Pradhan, columnist at Moneylife, who writes on insurance and fixed income products . Mr Basu explained the different types of fixed income products available and the returns one can expect. He also explained how much should allocate to different kinds of fixed-income products such as bank fixed deposits (FDs), corporate bonds and corporate FDs. Mr Pradhan gave insights to the audience on different investment options to benefit from high rates regime.

Mr Basu explained how over different age groups from 21 to 60 years, one can invest in a mix of equity and fixed income products. Stocks and equity funds over the long run of 5-10 years have more often than not beaten inflation. Other products like bank FDs and other fixed income products may not deliver high returns but offer safety of capital.

For those who have retired, Mr Basu advised the audience to create a two-part portfolio.
One, containing 60% of the total corpus to be invested in fixed income securities such as bank and corporate fixed deposits and bonds to garner safety for the portfolio. And the second, containing 40% of the total corpus should be invested in safe equity mutual funds, which would work towards beating inflation.  He illustrated this plan with an example, where he took an initial corpus of Rs1 crore and depicted its growth through graphs and charts, over a 20-year period.

For the fixed income part, one can choose from FD of banks, corporate bonds/non-convertible debentures, tax-free bonds, fixed maturity plans (FMP) of mutual funds and G-Secs. The different investment options needs to be evaluated for parameters such as safety, ease of investment, returns, liquidity, interest payment options and suitability based on your tax bracket. Each investment option was discussed in detail for its advantages and disadvantages. You can’t get best of everything in one instrument and hence there are good reasons to understand all the options and allocate your money in different options based on your risk appetite.

Bank FD from scheduled commercial banks is safe and the most popular option for Indians. The main disadvantage of it is that the returns are taxable as per your tax slab. It is better to avoid corporate FD. Bonds/NCD is better option than corporate FD. Credit rating is mandatory for NCD, but not for corporate FD. NCDs are more liquid because they can be traded in the secondary market in demat form once they are listed in the stock exchange. However, corporate FDs cannot be liquidated as easily. Secured NCDs are protected against the company’s assets while corporate fixed deposits are unsecured.

For those in 20% and especially 30% tax bracket an excellent option is tax-free bonds from Government companies. You have option for long-term investment as the bond terms are 10, 15 and 20 years. It helps with mitigation of reinvestment risks. Getting a near 9% pa tax free returns without reinvestment risk for 20 years from AAA rated government company should definitely be scooped by savers for their debt instrument portfolio.

FMP has a great tax advantage, but you need to choose carefully. Choose FMPs with high-rated securities investment. Make sure you don’t need the money in the interim. Assume that your investment will be illiquid till the FMP matures. G-secs are rarely explored as an investment option by retail investors, due to numerous reasons. The current scenario of the bond market, however, offers a unique opportunity to savers to add G-secs to their portfolio. The good news is that you have the option to buy G-secs and get it added to your regular demat account, which holds other asset classes like equities/bonds. So, you don’t have to buy gilt funds offered by fund houses, in case you want to directly invest in G-sec.

To become a member of Moneylife Foundation and avail benefits at no cost, click here.

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K Sunil Kumar

4 years ago

can i buy G sec from ICICI direct trading account


4 years ago

FMPs are sold as an alternative to bank fixed deposits. However, it would be a mistake to presume that FMPs are foolproof. The risk involved is small / insignificant, but should not be confused with zero risk.

The real test of FMPs being a safe investment would be, when the maturity of FMP coincides with a severe credit crisis or a credit crunch. However small this probability may appear, but if it were to happen, can have a deep impact.

Weekly Market Report: Nifty, Sensex in no man’s land

A close below 5,750 may signify a sharp decline

The holiday shortened week ended in the positive. This week saw the US government facing partial shutdown and the news making rounds that this may lead to possible postponement of the cut back of the stimulus.


The BSE 30-share Sensex rose 189 points (or 0.96%) to close the week at 19,915.95, while the Nifty settled at 5,907.30, up 74 points (or 1.27%).


On Monday, the market opened weak and ended in the negative for the second consecutive session, ahead of the worries of a possibility of the US government being headed for a shutdown. The US Congress failed to agree on a new budget. Market awaited the data of current account deficit (CAD) on Monday  anticipating it to widen to as high as 5.4% during the June quarter.


The Reserve Bank of India (RBI) plans to infuse Rs10,000 crore into the system through open-market operations next week to ease liquidity constraints brought some relief on the bourses and the Sensex closed in the positive on Tuesday.


Wednesday markets were closed. On Thursday, the market opened with full optimism and edged higher gradually. It ended in the green for the second consecutive session. The possible postponement of the cut back on the stimulus helped the Sensex continue in the positive. Fitch Ratings has warned India that any slippage on its policy front would have negative implications for its ratings, currently at the lowest investment grade. It also cautioned India that there is much capital still left which could outflow from the country.


On Friday, the Sensex continued with the third day of upmove. Activity at Indian services companies shrank at the fastest pace in more than four years last month. The HSBC Services Purchasing Managers' Index (PMI), compiled by Markit, slipped from 47.6 in August to 44.6 in September, its weakest since April 2009.


Jobless claims rose to 308,000 in the week ended September 28, from a revised 307,000, the Labor Department said. US payrolls data won't be released as scheduled today because of the shutdown. The department said that an alternative date for the September payrolls report and jobless rate hasn't been scheduled.



Back home, among the other indices on the NSE, the top two gainers were Realty (4%) and Bank (3%) while the bottom two losers were FMCG (2%) and PSE (1%).


Among the Nifty-50 stocks, the top five gainers for the week were Ranbaxy Laboratories (8%); Bajaj Auto (6%); Axis Bank (6%), DLF (6%) and IndusInd Bank (5%); while the bottom five losers were NTPC (4%); Oil & Natural Gas Corp (4%); ITC (2%); Hindustan Unilever (2%) and NMDC (2%).


Out of the 27 main sectors tracked by Moneylife, top five and the bottom five sectors were:


Top ML sector


Worst ML sector






Real Estate


Oil & Gas


Consumer Durables


Consumer Products


Lifestyle & Leisure










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