17/10/13: US budget crisis over

Back to work, no debt default

Earlier today, the US Congress agreed to end the partial government shutdown and raise the debt ceiling. Some positives...

1. While the run up to the 11th hour decision indicated that brinkmanship is alive and well in the US, the clear message is that at the end of the day the majority of US politicians will not let the US default on its debt servicing or broader spending commitments. As Winston Churchill once said "you can always rely on the American's to do the right thing - after they've tried everything else".

2. While the brinkmanship seen in the US on a semi-regular basis is not good for confidence, it is not all bad as it has let to a more balanced solution to US budget and debt problems than would have been the case if either side of politics had complete control.

3. The legislation for the temporary fix appears to include a rule that would allow the President to increase the debt ceiling unless Congress voted against it with a tow thirds majority in each chamber. Such an approach could allow the Republicans to vote against a debt ceiling increase in February but not stop it.

4. Finally, having been so badly burned over the last few weeks, Republicans may not be so willing to set off another Government shutdown and/or debt ceiling crisis early next year. Americans appear to have largely blamed them for the latest crisis and their favourable rating dropped to the lowest level in 20 years. With the mid-term Congressional elections coming up next year, they may not be prepared to risk a re-run or worse as it could mean they will lose control of the US House of Representatives. So another extreme showdown may end up being avoided next year.

With the worry list continuing to diminish, many believe that shares are likely to rally into year end with further gains next year, with some predicting that Australian shares could hit the 5500 mark by year end and 6000 by 30 June next year. While this may seem overly optimistic, an ASX at 6000 would still be about 13% below its all time high from 7 years earlier. Rick Maggi (Westmount. Financial Solutions.)