Here’s the latest on the House vote:
The U.S. House postponed a vote Thursday night on House Speaker John Boehner’s plan to raise the nation’s $14.3 trillion debt ceiling, after failing to round up enough votes to pass his measure with a deadline looming to avert a possible U.S. default.
This is not entirely surprising. As I wrote a few weeks ago:
So what might happen with the Debt Ceiling votes? My assumption, and also the assumption of alot of market participants, is that a deal will get done. But you can’t assume there won’t be some market moving shenanigans along the way. If anything, the House Republican caucus has become more ideologically rigid following the 2010 elections. Alot of their members are serious about this stuff, and some indications are that Republican leadership has lost control of its caucus.
So what happens now? My assumption is markets will not be happy tomorrow morning and will probably remain volatile throughout the day. There will be some scrambling around the halls of Congress, and markets will react to each rumor. It’s not a good environment to chase stocks. You want to stay disciplined, pick your spots and let things come to you.
The path forward is looking more and more like Boehner has to make his bill more appealing to the right wing of his party to pass. One of this things people were talking about tonight was Tea Party opposition to an inclusion of 17 Billion for Pell Grants for poor kids to go to college… seriously.
House conservatives who have stalled legislation to raise the national debt limit are angry that it includes $17 billion in supplemental spending for Pell Grants, which some compare to welfare.
Legislation crafted by House Speaker John Boehner (R-Ohio) to raise the debt limit by $900 billion would directly appropriate $9 billion for Pell Grants in 2012 and another $8 billion in 2013.
So Republican aids will be working through the night getting the bill leaner in order to flip 2 or 3 no votes. Assuming it passes at some point tomorrow, it then goes to the Senate where it will be… killed.
A Reid spokesman tells First Read how the Boehner legislation is tabled: “As soon as the Senate receives the House Message (Boehner bill), a motion to concur with the House Message is made. The Leader moves to table the motion to concur (majority vote threshold). The Boehner plan is defeated in the Senate.”
Indeed, Reid needs only 51 votes to do this, and then he can bring it back up if need be (if/when they compromise).
That last part is key. The Senate will kill the eventual House bill by tabling it. The Senate will then pass their version, the Reid bill. They will most likely sweeten the deal they are currently offering by incorporating a few compromises to the Boehner bill. This is in order to pick up the few dozen moderate Republicans left in the House whose votes are needed when the bill goes back there. Back in the House all the Democrats will then vote on a compromised version of the Reid Bill along with the necessary moderate Republican votes.
What could go wrong? Well, alot actually. Tonight’s failure to bring a vote to the House was significant because it severely weakened Speaker Boehner’s standing in the House and the Republican party. There’s a battle being waged in the House between Tea Party freshman and old smoke-filled-backroom veterans like Boehner. I have no idea what the whip count is on a compromised Senate bill coming back to the House when you have on-the-fence Republicans wondering whether their Speaker will even be Speaker after all this is done. Do Republicans who the White House and Senate are counting on to vote yes on a compromised House/Senate bill bail on their party leadership and find electoral comfort in the arms of the Tea Partiers?
And oh, by the way, has anyone even focused on what moderate Senate Republicans needed to pass a Reid bill will now do? Alot of these people like Olympia Snowe are going to get primaried next year and could be feeling some heat on stuff like this. Ain’t democracy great?
So these are the Doomsday Scenarios. If any of these things happen it’s watch out below. Especially with the weekend coming up. Market participants will want to see some sort of resolution by 4pm ET tomorrow. If they don’t have signs of a deal, they will bail on stocks. I’ll be watching for this type of thing and will want to take advantage of it using the XIV, as I discussed earlier.
But let’s assume deals do start to get done tomorrow. What should we be looking for for the market and the economy next week and over the next few months? The thing I would look out for is how front loaded the cuts are. The Reid proposal and the Boehner proposal are actually quite similar in a lot of ways. One of they key differences that has been discussed about them is the cuts that happen immediately. For the economy, the bigger the first year cuts are, the worse it is for GDP. Most of the numbers that have been thrown around seem pretty insignificant for the first year, but a compromised bill could increase those cuts in the first year. And with the still fragile recovery, that will be something traders will be looking at.
Ultimately, once this nonsense is behind us, the markets will go back to what they should be interested in… earnings and economic data. This is what will determine whether this was a hiccup for a market that wants to make new highs, or whether those highs we just saw were the top of the market for a while.