“When you have a country that’s been accustomed to government spending at a certain level, it is really hard to ratchet it back.” –Mike Lee

I talked about “the Flippening” concept yesterday and continue to emphasize the point that the conditions favor a tail event in the immediate future. In many ways it doesn’t matter what causes it. The tinder is dry and anything can start the fire. It does seem like the government shutdown could be a legitimate catalyst for forcing back the flight to safety trade in Treasuries.

The Potential Government Shutdown

A government shutdown occurs when Congress fails to pass (or the president fails to sign into law) legislation funding government operations and agencies. This leads to a partial or full closure of government agencies. Only essential services can continue to operate. Historically, government shutdowns have had a limited impact on markets. For instance, during the 16-day shutdown in 2013 initiated by Tea Party Republicans, the S&P 500 initially experienced a drop but quickly recovered — and even rallied — after the government reopened.

That’s not to say, however, that this time couldn’t be different. Moody’s saying it would have a negative impact on the credit quality of the United States, at a time when Treasuries have been crashing, makes this a very dangerous juncture. While past shutdowns have been relatively short-lived and caused minimal disruption, there is always the chance that the situation could escalate, especially if the shutdown is prolonged.

At present, the House of Representatives has yet to pass the required 12 appropriations bills to fund the government. With only a few working days left, it appears that a stop-gap “continuing resolution” may be necessary to prevent a shutdown. However, the passage of such a resolution is being hindered by internal disagreements among House Republicans. Certain far-right members refuse to support the measure without concessions to their own priorities. I myself have heard that “it’s worse than what the media says,” suggesting some real acrimonious discussions are underway.

So What?

If a government shutdown is prolonged, it could potentially have a long-term impact on the stock market. Prolonged shutdowns can cause significant economic damage, including reduced economic growth, increased unemployment, and lower consumer and business confidence. These factors can all contribute to a bearish market environment. It, oddly enough, also might be what the Federal Reserve needs to shock disinflation outside of rate hikes, helping it get closer to the 2% inflation target.

During times of economic uncertainty, investors often seek safe-haven assets such as U.S. Treasury bonds. Many consider these bonds to be one of the safest investments available. After all, they are backed by the full faith and credit of the U.S. government. It’s been a long time since we’ve seen this sequence behavior — what I’ve called the “phoenix rising” on X, the platform formerly known as Twitter. I suspect yesterday marked a pivotal juncture that could now finally see that trade work relative to stocks — the Flippening.

The bottom line here is simple: while a government shutdown could potentially shock the stock market, it’s important to remember that these events are typically temporary and have historically had limited long-term impacts on the market. Having said that, I do continue to sound the alarm that the risk of an imminent tail event is real and underappreciated by equity bulls unable to admit that maybe, just maybe, we are still in a bear market after all.

On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.