As we move into the second week of the shutdown—and another day closer to running out of room to maneuver around the debt ceiling—cracks are starting to appear.

On the political level, there’s an apparent disconnect between a White House potentially willing to accept a short-term rise in the debt ceiling and a Senate holding out for a longer-term deal on the Democrat side. In the Virginia governor’s race, the Democrat appears to be gaining an edge from the shutdown. The Senate Democrats are talking about passing a clean continuing resolution themselves, rather than waiting for one from the House Republicans—who have been taunting them about their unwillingness to force Democrat senators to make a potentially tough vote. In short, we’re seeing the usual political circus.

The government shutdown has gotten most of the press coverage so far, but there is a related and bigger issue pending in the next couple of weeks: the debt ceiling. Although the federal government has partially shut down, it continues to spend money on many items. Normal government financing requires regular additional borrowing, as we typically spend more than we take in.

I hate writing about politics, I really do. But, as we’ve seen repeatedly over the past couple of years, politics is now economics, and, therefore, it behooves us to get to grips with what that means for our country—and our investments.

One of the driving memes about Obamacare has been that it socializes a large section of the economy. The Republicans use this as an argument against, while the Democrats by and large see it as a feature, not a bug. The destination on the horizon, for both, is a more European polity. That means slower growth and stagnation for the Republicans and more social justice for the Democrats—in any event, a more European-style economy.

The market has bounced around without a lot of direction over the past couple of days, popping up this morning after a rough showing yesterday. What’s going on?

Ultimately, stock prices reflect corporate earnings per share, and the bouncing prices can credibly be tied to expectations about what the government shutdown and potential debt ceiling confrontation will mean for those earnings. The changes in prices reflect the market’s attempt to come to grips with what we can expect to see over the next couple of quarters.

Despite turbulence, a strong September and third quarter

Despite economic and political turmoil, markets performed well across the board in September, with almost all asset classes showing strong returns, reversing many of August’s losses. This also resulted in positive overall quarterly performance.

http://www.youtube.com/watch?v=5VKmPGILHLo&list=TLbMy8cCokDYIW7qOXu7rvZZppk8O7iqwG  

Since there’s really no movement in the DC stalemate, I thought I’d highlight some good news today. I continue to keep an eye on the government, and the risk grows daily. At the same time, though, it’s important to remember that there is life beyond the Beltway (for those who don’t know, that’s the highway surrounding Washington, DC) and that the real economy is actually doing pretty well. Even as DC stares and Wall Street trembles, Main Street has some news to be glad about.

1. Initial jobless claims remain quite low, at 308,000.

With the government shutdown entering its second day—and apparently no negotiations under way between the Republicans and Democrats—the prospect of an early compromise agreement doesn’t look good. A headline in today’s Wall Street Journal, “Capital Digs In for Long Haul,” pretty much says it all.

The markets yesterday seemed to shrug off the shutdown. Much of the commentary has been along the lines that the shutdown is no big deal, a compromise will certainly be reached, and this is actually a buying opportunity. That may end up being the case, but I think it makes sense to at least consider the other possibility: that the stalemate continues until the Treasury runs out of accounting tricks to avoid the fact that the government is now at the debt ceiling, which should be in the next couple of weeks.

For the first time since 1995–1996, the U.S. government has been shut down in a dispute over the federal budget. Now that it has happened, we can start to assess the damage, as well as evaluate how the dispute is likely to play out.

Before we do, there are a couple of important things to keep in mind. First, we made it through the 1995–1996 shutdown, and we will make it through this one. Second, although there will be damage, it will be limited. Just as with the sequester spending cuts, the damage will be absorbed and the economy will return to growth. This too will pass.

“In spite of the cost of living, it’s still popular.” — Laurence J. Peter