The stalemate on Capitol Hill continues. The market has had a small bounce today on news that the White House will meet with congressional leaders after the close of trading today but we’re not expecting much news out of that meeting. It’s looking more and more like any deal on the government shutdown and the impending Debt Ceiling will have to be co-mingled in order for any deal to happen in the next two weeks (Debt Ceiling deadline is October 17th.)
Robert Costa of the National Review, who’s been doing great work following the GOP House maneuvering, had this to report today:
As one House Republican explains, the leadership has, in essence, nearly given up on the idea that Senate majority leader Harry Reid will concede anything, at least in the short term, so they’re looking at how to potentially tie the debt limit to the CR impasse to force Reid’s hand. Ryan, as budget chairman and the House’s conservative whisper, is at the center of these speculative strategy talks — he knows, in fiscal and political terms, what he wants to achieve, and what his colleagues are likely to support.
Ryan, for his part, seems to have expected, all along, that the CR debate would unfold this way — crashing into the debt limit and creating a larger discussion beyond government funding. “I think it will fold into the debt-ceiling fight. I think that’s inevitable, and preferable in my opinion,” he said, in an interview with National Review’s Jonathan Strong last week. “I like combining all of our leverage, which is sequester and the debt limit.”
In case you’re keeping score at home, Ryan is someone who, quite literally, lost the last election on this very debate. The White House has explicitly stated that any changes to the Affordable Care Act are off the table during these “negotiations” and has no problem bringing up the last election. Additionally, the proposed Continuing Resolution out of the Senate already stands at sequester level cuts, so the Senate Democrats don’t really feel like “they aren’t compromising” as they feel the sequester level cuts are the compromise.
Combine all that with the fact that this is a very different House than the one that everyone remembers from the famous 90’s shut-downs. In today’s House, as the National Journal puts it, the Republicans are much more insulated against a backlash:
Resolving the serial showdowns over the federal budget and debt ceiling may be more difficult now than during the last shutdown under Bill Clinton and Newt Gingrich because so many more House Republicans today represent safely GOP districts, a National Journal analysis has found.
This suggests that even if a public backlash develops against a shutdown or potential government default, Republican members may be far more insulated against those gales than their counterparts were during the two shutdowns in the winter of 1995 and 1996. Today’s GOP legislators, for the same reason, also may be less sensitive to shifts in public attitudes that could threaten their party’s national image or standing in more closely contested parts of the country.
Comparing today’s 232-seat Republican majority with the 236 seats Republicans ultimately held after special elections and party switches from 1995-96 underscores the extent to which GOP legislators have succeeded in fortifying themselves into homogeneously conservative districts. On every measure, Republicans today represent constituencies that lean more lopsidedly toward their party.
On average, Clinton in 1992 won 46.6 percent of the two-party presidential vote in the districts held by congressional Republicans during the 104th Congress from 1995-96. (That two-party calculation excludes the share carried by Ross Perot in his independent bid that year.) President Obama last year carried only an average of 40.4 percent of the two-party presidential vote in the districts held by the current Republican majority.
Back in 1995, 79 House Republicans represented districts that backed Clinton in the previous presidential election; just 17 House Republicans now represent districts that Obama won. Fewer Republicans now hold districts that fall into an even broader definition of competitiveness: In 1992, Republican President George H.W. Bush won 55 percent or less of the two-party presidential vote in 141 of the 236 House Republican districts. Now, only 71 House Republicans, roughly half as many, represent districts where 2012 nominee Mitt Romney won only 55 percent or less.
All of this means that the personal electoral incentives for most House Republicans would encourage more—not less—confrontation as the standoffs proceed, notes Gary C. Jacobson, an expert on Congress at the University of California (San Diego). “The electoral threat of them angering anybody outside of their base is pretty low,” he says.
Basically, unless total public opinion shifts to such an extent that House Republicans from the reddest of red districts have to fold (not happening), we just don’t see any clear path out of this mess. This whole exercise is looking more and more like a final battle for control within the Republican House between Tea Partiers from really red districts and mainstream Republicans from less safe districts. (If you notice, alot of the House Republican defectors on this issue tend to be from Blue States, perhaps they have Senate dreams.) with the Democratic controlled Senate and White House merely spectators. We can’t imagine any deal coming out of the meeting tonight, and if there was a call option on everyone running to the press afterwards to howl about “the lecture they got during the meeting” we’d buy it.
So where’s that leave our VIX strategy? Here’s a recap of the structure:
TRADE: Sold the VIX (14.30) Oct 14 Put to Buy the Oct 16/19 Call Spread for Even Money
- Sold 1 VIX Oct 14 Put at 0.45
- Bought 1 Oct 16 Call for 0.95
- Sold 1 Oct 19 call at 0.50
With the spot VIX around 16 and change, and the Oct VIX futures right around 16 this structure is very near to being in the money and mark to market is about 35c, and any further negative news out of DC could see the VIX up near 18. Any grand bargain on both the shut-down and the debt ceiling will quickly see the VIX drop down towards 14 or lower. Because the futures tend to lag the spot, in that scenario we feel fairly confident in our ability to get out of the trade without a loss from the short 14 puts.
So we’ll continue to hold this trade and see how things play out. The trade expires on the 16th, a day before the Debt Ceiling deadline. If this stuff goes down to the wire it could be a great position to have for that scenario.
UPDATE: 2pm Wednesday
White House Spokesman Jay Carney says serious negotiations with Congress can’t start until government is re-opened with Continuing Resolution. This makes it even more unlikely for a grand bargain on both issues at once as the White House seems to be calling their bluff on co-mingling the two.