Blog : And Now For the Good News...

by Ed Zwirn on October 5th, 2013

With a debt ceiling crisis set to dovetail with the continuing government "shutdown," U.S. House of Representatives Speaker John Boehner's reported promise that he would let a borrowing bill come to a vote even if most members of his party balk at it would appear to be good news.

The Republicans still owe at least some of their support to Wall Street interests, and these interests are hitting back big against a possible default on U.S. government debt on Oct. 17, and everybody from the ratings agencies, major investors and the president himself has correctly painted the consequences of this default as more dire than the selective curtailment of government operations we are already experiencing.

We have gone through the latter before. The 2.6% GDP decrease which coincided with the 1995-96 21-day government closure was bad, the argument goes, but the economy and the stock market did recover after that. Of course, the economy was in better shape back then, but never mind.

But the justified perception that a U.S. government debt default would be worse than a continued furlough for hundreds of thousands of federal workers means that this shutdown is going to be a long one, giving both sides of the political conflict the opportunity to tell the public they are holding fast to their principles.

Even if the government were to return to operation quickly, the damage already done would prove to be a drag on an already poorly performing labor market and on businesses, particularly those feeding off of the government trough. But the likelihood of the shutdown's extending several weeks is bound to have an effect on the market.

First of all, the drag on the economy will have to be at least partly counterbalanced by Federal Reserve action, or inaction. The obvious needs stating: The machinations in Congress over the debt and government spending have taken even the remote possibility of any Fed tapering off the table, certainly if you are talking about the Fed's Oct. 30 announcement.

This poses both a challenge and an opportunity for penny stock investors. Pressures on the economy and on financial markets never tend to do any kind of investment any good, all else being equal. On the other hand, smaller cap stocks, including penny stocks, have actually been performing well compared to blue chip titans, and this will probably continue as long as the U.S. central bank continues to pump money into the system and interest rates stay low, driving appetite for yield. Given the dysfunction of our political system, this pump may be in operation longer than people think.