Why the Budget Mess Won't Matter

Focus: MARKETS

Jim Jubak Image Jim Jubak Founder and Editor, JubakPicks.com

We've learned not to expect answers from Congress and the president anyway. So the markets are betting that the world's central banks will keep things rolling along, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

The question from the audience during a Saturday afternoon panel at the MoneyShow in Orlando was direct: How did we think the coming mess in Washington—the battle in March, April, and May over the mandatory budget cuts called sequestration, a continuing resolution to fund the federal government, and another increase in the debt ceiling—would affect the financial markets?

The gasp of surprise was theatrically audible after my answer: I don't think it will have any effect.

My response wasn't for shock value. I really do think the markets are unlikely to move much in response to whatever Congress and the president do—or don't do—over the next few months. I don't think that's because the US deficit isn't important, or because the US budget isn't a mess, or because Washington can't tank the real US economy. I just don't think that the market is going to go down on bad news from Washington.

Whatever the fears of individual investors about our economic and financial future—and I think those fears are entirely justified—the big money that dominates the financial markets has decided to put its faith in the actions of the world's central banks.

Believing the Fed Can Fix Anything
If things go wrong in Washington—and I find it hard to imagine that they won't—central banks will ride to the rescue again, this belief goes.

Even though further expansion of the balance sheets at the Federal Reserve or the European Central Bank might seem like bad monetary policy, Wall Street is convinced that central banks don't have a choice.

Faced with declining asset prices because of stupidity in Washington, Fed Chairman Ben Bernanke and ECB President Mario Draghi will throw more money at the markets.