Happy Sunday and welcome to our flagship editorial at Steno Research.

We have noted how the overwhelming consensus once again expects the USD to suffer when push comes to shove in the debt ceiling soap opera.

We find many similarities between the current stand-off between Biden and McCarthy and the stand-off between Clinton and Gingrich in 1995/1996 not least due to the timing relative to the upcoming election cycle. A game-theoretical analysis leads to the conclusion that it is in both parties’ interest to allow a partial shutdown, which makes it our base-case.

The interesting thing is that it means the EXACT opposite for markets compared to the current consensus narrative. Let’s dig right into it.

Why this looks like 1995/1996 all over again from a political perspective

Biden and McCarthy postponed the meeting on the debt ceiling until next week and we see more and more similarities to the Clinton vs Gingrich stand-off in 1995/1996 that ultimately concluded in a relatively lengthy partial shutdown of the US Federal Government.

Joe Biden has an incentive in allowing the right wing of the Republicans to take the “blame” for a shutdown, while the right wing of the Republicans have an incentive to force the shutdown as well as members of the house can tour with a narrative that they prevented another “DC spending spree”. McCarthy (speaker of the house) is probably the only agent with a true incentive to broker a deal, but a partial shutdown seems unavoidable from a game theoretical perspective, which is a thesis that has also been floated by Paolo Macro.

The interesting thing is that the market behaves empirically upside/down to the current market consensus around the debt ceiling debacle.