GOLDEN VALLEY, Minn. - If a bi-partisan deficit reduction agreement is not reached Friday, March 1st, the sequester law, bringing about cuts in almost every line of the government's discretionary and defense spending, will take effect.
Dan Ament, Financial Advisor with Morgan Stanley in Wayzata joined KARE 11 Sunrise to discuss the potential turmoil facing the economy and investors.
March 1st - sequestrations begin for 2013 (full year est.)
"Supercommittee Sequestration": Defense, discretionary funding $54.6B
Non-defense, discretionary funding $38.0B
Non-exempt, mandatory programs generally $5.5B
Medicare funding $11.1B
Subtotal, Supercommittee sequestration $109.2B
"Cap sequestration" of discretionary defense funding $10.9B
Both sequestrations $120
(Source: Office of Management and Budget (OMB) and Citi Research - US Equity Strategy)
"My way or the highway" public approach. Growing risk that sequester and related cuts develop, at least in the short term. Sequestration or automatic spending reductions, (with half of the roughly $85 billion occurring in defense expenditures) are a result of the budget agreement in 2011 that both parties approved when the super committee was unable to compromise on reforms to spending and taxes. Both sides do not like the option of it happening since it will cause pain in some of their favorite areas. But, at the same time, both the President and the GOP seem to be taking a "my way or the highway" public approach which provides little room for agreement right now.
March 27th - continuing resolution (CR) deadline may be the most critical for investors. The so-called "CR" is important in that on March 27, the government runs out of budget authority to continue spending at its current run rate and a government shutdown essentially occurs. Congress must pass new legislation and the Republicans perceive this as their best shot at addressing entitlement spending, plus the CR provides another chance to tackle the sequester cuts. The GOP is wary of being seen as extreme (by shutting down the government), given 2014 midterm elections. Hence, the discord could unnerve markets even if an eventual compromise is assumed, although the 1995-96 shutdown did not result in a S&P 500 correction.
May 19th - the debt ceiling .... Again. The debt ceiling is seen as somewhat of a nuclear option as few seem willing to risk the "full faith". The Republicans purposely re-sequenced the debt ceiling to May 19 in order to tackle sequestration and the CR first. But, it is possible for it to get kicked down the road again to avoid the mere thought of a technical default.
(Copyright 2013 by KARE. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.)