Gavyn Davies tries to explain why markets have not yet reacted to the government shutdown and looming debt ceiling, and how that could be a big problem.
“If investors repeatedly buy more insurance than their competitors, and this insurance then expires worthless, the safety-first investors will under-perform their peers most of the time… But market disruption in both of those earlier episodes turned out to be relatively minor and short-lived. Investors who purchased insurance probably incurred costs which did not prove worthwhile.”
“One consequence is that the normal feedback from political error to market disruption and back to improved political decisions is not really operating this time. This could make Washington more likely to go to the very brink, implying that the bout of uncertainty in markets could come very late in the day, and be more severe when it happens.”
