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All that seems kind of moot in the context of maybe our government's going to shut down tonight at midnight when we'll be fast asleep. But Wendy Schiller, she joined us in Brown University, and we want to get some informed comments about how this might play out here.
So Wendy A, I'm.
Not sure if you're in the business of predicting shutdowns or not, but I'd love to get your perspective on just kind of how the whole process here is unwinding. In Washington, We've got a couple of civilians, President elect Trump and Elon Musk right smack in the middle of the discussion in the news cycle. And I've got a President of the United States who I haven't heard anything from. So house is developing well.
I think President Biden has seeded sort of the negotiating power of the Democrats to Jakim Jeffries, who's the Democratic leader in the House Representatives.
And Chuck Schumer, Senator from New York.
Who's still the majority leader of the United States Senate till January third. So there basically Biden said, you know, you decide what our position will be, and I'll likely you know, sign it.
So he's seated all of that negotiating power to them.
And I think this is really important for everyone to remember. We have a bi cameral legislature. You know, the founders set it up this way on purpose. You two institutions that have very different electoral incentives, very different internal structure, different terms of office.
And we're seeing that play out right now. I mean, the Senate's just literally hanging out waiting.
For the House to deliver something, and the Democrats control the Senate, so all of this is about.
Well, the passes the House, it'll go through not so fast.
The Democratic controlled Senate will say no, we're not going to pass it. So the Democrats have some risk here because they be party to the shutdown.
The way the Republicans are.
And since it's a divided government right now, it's really unclear for the voters who are you actually going to blame. Right now, the Democrats have decided they're going to blame elon Musk. They have made Musk a target of their communications, and you're starting to see a little bit of this creep into some of those Republicans who voted against the package yesterday.
I mean, we just had a story that came out on the Bloomberg terminal saying that House Speaker Mike Johnson is currently strategizing a way to rush a spending bill through the Chamber to avoid a government shut down ahead of that midnight deadline that we've been talking about. I do know that the longest government shut down in recent history was in twenty eighteen under the Trump administration. It
lasted thirty five days. If we were to enter into a government shutdown, how do people actually analyze and predict the longevity of how long it could last.
Well, you know, if you're thinking Trump and Trump's strategy, you think, well, if we're going to go into US shutdown, let's shut it down till I get inaugurated, and then then of course we'll open it back up because at that point the Republicans will control the House and the Senate, so we'll have more sway and he's willing to sort
of live with the costs that are incurred. Usually, you know, a shutdown on this length usually costs several billion dollars, not only in pay for federal employees, but for all sorts of disruptions to all sorts of services that the federal government provides to the economy. So you're going to see a cost here. But then Trump gets to be the hero by reopening.
The government on his terms, and I think that's the way he's thinking.
The debt ceiling is the interesting question here because the Republicans have voted against this bill yesterday, really voted against it because the dead ceiling extension ran through twenty twenty seven and basically gave Trump an unlimited checkbook. And they are deficit hawks, and even they were not willing to
go there for Donald Trump. So there must be something that they're sensing about how they would face the voters again in twenty six that says we don't want to be responsible for blowing up the federal.
Debt and the deficit even more than it is.
I mean, we're sitting here in December, we're still about a month away from inauguration day. Paul and I were chatting earlier how typical Is it historically that we have the president elect implementing it weighing in on these things. Where is Biden and Harris in this conversation? Is this all typical?
I mean, it's it's you know, we haven't had as much ringmanship, let's say, in December with an election switch. We've certainly hadmanship with Ronald Reagan in December, with Barack Obama in December.
So you've had sitting presidents have this issue.
But the transition in power, I mean, it does really happen, right, I mean, you won the election, You're going to be president. But in terms of the Trump sway of the GOP, that's what we're talking about here, is that it is a wholly owned subsidiary of Donald Trump. But right now we're seeing cracks in that coalition. And the question is what's driving those cracks. Is it get rid of Elon Musk.
Is it thinking that this is just a bridge too far in terms of federal spending, or is that they think they'll get some political gain by shutting it down and we open under Trump with more capital with a Republican control House and Senate. We're just not getting any real signals from the Republicans that matter, meaning the ones that voted against the bill yesterday.
But a shutdown is not a way to.
Start an administration, no matter what Donald Trump thinks. It's disruptive, and he's got very high approval ratings. Now I'm not sure those are going to go higher by inconveniencing a lot of people over the next couple of weeks.
Wendy is, do some people in Washington, on either side or both sides of the auduld that they view President elect Trump is maybe even a lame duck president. I don't really need to bend over backwards for this guy because he's only here for four years.
Well, certainly, if you're a senator that was elected in twenty twenty four or even twenty twenty two, you're thinking you're probably going to outlast Trump. But then again, lots of people thought Trump might not run again, get the nomination and win again. I just don't think you can
underestimate Donald Trump's political power. But you have an economy that seems to be coming along in terms of growth, and the employment numbers are sort of okay, you know, not disastrous or anything, but inflation is really sticky.
And the question is if there isn't a real change in.
People's perception of the economy by the summer, I think a lot of Trump's clout could diminish, even among his own base, and.
Then you're looking at the next electoral cycle.
So that is where separation of powers is really crucial here. It creates different incentives and we're seeing those incentives play.
Out right now.
When you am curious, do you know the intricacies of what the potential financial implications could be for non essential government workers? Do they get paid retroactively or do they just go without pay?
Typically, Congress insists on passing a separate bill to authorize retroactive pay for federal employees that have been furloughed or not paid during a shutdown, So you know, it varies
depending on the shutdown, depending on the Congress. You can see where most people would want to see people paid for work that they do, but if you're not working, then there could be an argument, well, you weren't working, so this is a bloat of the federal government, and we're not paying you for work that you didn't do. You know, the problem with the Republican Party is that the federal government civilian force is large and diverse and
spread out all across the country. So in every congressional district there will be federal employees or people associated with the federal government that will lose income because of a shutdown, and those congress people are going.
To hear from those employees.
So this becomes very sticky if they don't agree to retroactively reimburse these employees.
But remember the reason that Donald Trump.
Quote unquote caved in twenty eighteen and reopened the government was that the FAA and air traffic controllers and sort of our TSA employees, all of that became very difficult for people who weren't.
Getting paid and decided not to show up for work.
And that clog in the economy is what pushed Trump to the table, and so that's why it's curious that he'd want to start an administration with another clog in the economy.
All Right, Wendy, thank you so much. We appreciate that. Wendy Shulis, she's a professor at Brown University and she is the intermim director of the Watson Institute. Joining us from Providence O Rhode Island versus that zoom thing. So again, I guess the initial deadline is going to be midnight tonight, right, so we'll wake up tomorrow and the government will need to.
Be open or not right obviously, like you exactly.
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Normal Linda sitting in for Alex Steel here today on Paul Suni where you are streaming live on YouTube. Ahead over to YouTube dot com and search Bloomberg Podcast. Also doing this whole live thing from the Bloomberg Interactive Broker studio here in New York City. The government shutdown is a thing, and we kind of kind of getting used to it. I guess it seems to happen at least once a year these days. Let's put this whole thing in perspective and how the next several days might unfurlier.
Christopher smart joint is he's a managing partner at our Growth Group, and he's a former Special Assistant to the President for International Economics. Joining us from Boston via that zoom thing. Hey, Chris, thanks so much for joining us here. I guess again, we've all in this market become I guess, kind of used to these threats of government shutdowns. What's a little bit different this time is we have a couple of civilians that are really weighing in and almost
driving part of the conversation. That is President elect Trump and Elon Musk really involved here. What do you make of that whole dynamic, because that seems a little bit unique.
It seems very unique. I'm not sure we're supposed add modify us to unique, but it is a very different rhythm from the traditional government shutdown background music that many investors are used to at this time of year. Along with the Salvation Army bell ringers and anybody singing carols at your door. There is always the drama of when Congress will go home, will there be a budget or
will there be a continuing resolution? And what services married and I may not get shut down for a few days, as you say, the difference, one big difference this time is we have a president elect who's not really president, scuttling what had been agreed by all sides earlier this week we have, as you say, as civilians, somebody who's not even headed for a government role, an official government role at least, who's also sort of driving the dynamics
on social media that we haven't really seen anywhere.
In the past.
And then I guess to me the third thing, as from the market's perspective, there's one thing that the markets always hate, which is the debt limit debate that comes up from time to time and the threat of the United States defaulting here the fact that President like Trump has sort of introduced this is one of his asks in the continuing Resolution, at least that's what it's been in the last twenty four hours. We'll see how that evolved. But markets would love to see this thing go away.
The problem is getting the math to work on that particular part of an already complicated bill becomes very, very difficult.
It feels like in markets we have so many things to worry about right now. Honestly, my eyes are on so many different things right now, especially with this being a FED week. But of course as a concern, as we're thinking about the uncertainty that could be upcoming in this situation, what is the impact on markets here? Historically do we really care about a government shut down in terms of the near term, I.
Think probably less so this time around. First of all, the sell off that we've seen this week was squarely linked to the fed's statements and more hawkish music coming from that part of Washington. If we were sort of really on the verge of a recession and you worried that government spending would be cut off and government activity would tip the balance into a recession, then I think markets will be paying much more, much closer attention to
what's going on right now. But you have an economy that is on the margin running a little bit hotter than the FED would like, and you know, from a macroeconomic perspective, a little bit of cooling, even if it comes from a shutdown, is probably not a bad thing overall. Obviously, from a governance perspective, from a predictability perspective, from a political perspective, it's it's never a good thing when you have it this kind of dynamic in the in the background.
And I think the thing around these government shut off shutdown excuse me, is that once they happen, it's never clearer if it's going to be a quick one or a long one, and once ide start digging in, this could go on well into the into the new year.
So again, we were just talking with one of our analysts, Bloomberg Intelligence, who covers the Washington policy, and he had raised his risk of a shutdown or os of a shutdown to forty percent. That's up from I think twenty or thirty percent just a day or two ago. My senses, you feel like it's maybe even higher than that.
Here.
What are the what's the politics of a shutdown here? How would you view the politics of a shutdown that might go through the holidays.
Well, I'm not.
Sure anybody benefits from a shutdown, but the question is always can you blame the other person more? And obviously I think at this stage it looks like this has been a shutdown that's been triggered by Elon Musk and Donald Trump scuppering this late deal that the Republicans Democrats
had agreed to. Having said that President Trump just won a big election, it's very easy for him to write the narrative that this is Washington insider backroom dealing that he is fighting against and has promised to eliminate in Washington. So I'm not sure I think both sides feel like they've got the upper hand here, which should think, as you say, leads me to believe that the odds are
maybe higher than forty percent. Although you know, these things tend to change very quickly from one hour to the next. It just doesn't seem to me that anybody's got a real reason to compromise at this stage. The one, you know, minor deadline that's coming up is actually the president's inauguration. Does he want to be sworn into office with the government still shut down? But between now and then, I'm not sure what's going to force one side or the other to come to the table.
When we're thinking about the market, what sectors in particular could be potentially exposed to the impact of a government shut down.
Again, if it's shutting things down for a week or a month, even two months, the macroeconomic impact is fairly fairly limited. Obviously, you can see government contracts that don't get written, you know, maybe defense contracts that don't get done this year or get pushed into next year. You get a lot of uncertainty. You know that maybe some businesses aren't planning their investments the way they would like
to given the uncertainty around government spending. But the real questions are not so much around the shutdown itself, as I think everybody is looking to both the tax debate that's going to come into line very quickly and what sort of differences they can expect in terms of corporate taxes and potential rollbacks of President Biden's subsidies to the automotive,
to the electric vehicle, to the clean energy industry. And then the other piece of that I think that he's driving things are the terraff wars that are building up.
Christopher Smart, thank you so much for joining us. Chris Smart, he's a managing partner in a growth group, former Special Assistant to the President for International economics, just giving us his thoughts here on the potential shutdown. I think as Chris was just mentioning, he kind of feels like this is somebody that may come to fruition and so have to see will pay attention. That's starting midnight tonight.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple car Playing and Broun Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
Normal Linda sitting in for Alex Steel on Paul Swooney Your Life here in our Bloomberg Interactive Brokers studio, or streaming live on YouTube as well. So check us out on YouTube dot com slots Boom Bloomberg podcast Again, Like Charlie Pellet, I'm trying to figure out what the heck going on in this market, what's driving the higher here?
You know, I'm seeing a couple of things, maybe, you know, I'm looking at the top go on the Bloomberg terminal, Fed's favorite inflation gauge cools to the slowest pace since May. So maybe this economic data people is really starting to digest it and say, all right, maybe this inflation thing is is not as concerning as maybe we thought. That might give the FED some room on the rates here,
you know. And I think the question is maybe the reaction to the Fed's meeting on Wednesday again, SMP off two and a half percent last top of three and a half percent. Maybe that's a little bit of an overreaction.
We're seeing real estate the best performing sector today and then information technology is the second best.
Real estate and that's my career.
Real estate.
All right, very good. We appreciate that Sandy Berger joins us. She's the chief client officer. I'm sure she's got some thoughts here. The firm's experient and she joins us via zoom. Sandy, what do you make of the last I don't know, four five, six days in this marketplace. We've got geopolitics, we've got domestic politics with the government shutdown, We've got federal reserve. Boy, there's a lot of cross currents for investors to navigate.
Well, it's been an exciting week, and every day there is a new twist. In turn. We've been telling our clients, who are corporate executives, family business owners and entrepreneurs to be ready for anything and to be thoughtfully and thoughtfully diversified in their portfolios. That's what we've been doing for them. But in terms of the economy right now, things are looking pretty good in our We have a strong economy,
strong corporate earnings. There are some wild cards on out there that could change things, and I think we got a taste of some of those wild cards this week, especially in terms of the Fed's decision regarding interest rates and slowing down the pace. There so a lot of volatility within the week. We wouldn't be surprised if volatility continued into twenty twenty five. But at this point on our base case scenario, we're not expecting any major changes. We think things look good out there.
Sandy, you mentioned wild cards. There's so much volatility. Where are you guys staying, what do you like right now? And where are you avoiding?
So within our portfolios, as I was mentioning, we really truly believe that now more than ever, diversification is important, and we're pretty well balanced between bonds and equities, though tilting toward equities. Within the equity markets, we do like the US market, particularly large cap value. It really has not been the place to be for a long time. On balance, we think that there's some real opportunity there.
We also like small caps in the United States, also on the value side, and really looking at the higher quality small company so companies that have strong balance sheets, that have great business models, that are going to do well during good economic times and bad. And then we do have some of our allocation overseas. We're particularly more bullish on Europe at this point and also Japan.
When we look at the fact that we've hit so many record highs for the S and P five hundred in the market more broadly this year more than fifty times. Is there any discussion around whether or not market valuations have been too high?
In our estimation, the US large cap growth area is running pretty hot. Still, we think valuations are high there. You look at the SMP five hundred earnings currently pees at twenty two, an average is more like sixteen. So you could make some arguments that some stocks have gotten ahead of themselves. That's why we are tilting toward value in some of the areas of the market that haven't gotten as much play. But you know, it all depends upon what happens in the economy in how corporate ar
needs continue in the period ahead. And again, without some of these wild cards coming into tuition I talked about inflation, interest rates would be another wild card, and of course we have deficits and tariffs out there as well. We could see sustained levels in the markets if those wild cards don't show their ugly faces and create some surprises and sandy.
You know, since the election, at least from my perspective, has been a palpable sense of optimism, economic optimism, optimism about the markets, optimism about taking risk. Do you get that when you talk to your clients.
So, our clients are mostly based in the United States, we have some that are located overseas, and they represent all aspects of the political spectrum. And so what I've noticed it's clients who have strong political views on one side of the spectrum, where the other that are either
the most bullish around economy or the most concerned. So we're hearing a lot of different things from our clients, and our jobs really is to meet them where they are, keep in mind what they're trying to achieve with their long term financial plans and what they're really focused on, and making sure that we're helping them make decisions about their portfolios that are going to be invested in service of what they're trying to achieve, and keeping them keeping
a check on any strong feelings one way or the other between bolishness or bearishness. We hear it all, Paul Sandy.
One of the latest wildcards, of course, that we're monitoring and the rest of the market is monitoring today is the potential government shutdown. How have markets historically responded to government shutdowns and what are you all thinking about what we're seeing today in about thirty seconds.
Or less, Nora, the shutdowns tend to be a non market event, in a non economic event, so we've been telling clients who've been concerned not to worry about it. The interesting thing about this potential shutdown is that it really is an early test, perhaps of the cohesiveness of
the Republican Party. So if we were to see a prolonged shutdown, and that's not necessarily what we're expecting, but if we saw one, that could put into question some of the Republican Party's ability to rally around other policies that people are expecting to come into fruition, like tax reform later next year.
Sandy, thank you so much. We appreciate it. Thanks for your time, Sandy Berger, Chief Client Officer, Experient giving us her thoughts on the markets.
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