The US credit rating has been downgraded by S&P - not good...

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dshields's picture
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The US credit rating has been downgraded by S&P - not good...

http://www.zerohedge.com/news/sp-downgrades-us-aa-outlook-negative-full-...

 

pinecarr's picture
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Whoah!!!

I'd be lying if I said this news didn't give me a chill...

Wendy S. Delmater's picture
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we saw this coming, but...

Oh, crap. Fun times ahaed.

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 So tell me if my logic is

 So tell me if my logic is correct. The Bond market is much larger than the stock market. The S&P and other rating agencies rate the BOND ratings, not stock ratings. So I see the stock market taking a hit like it did when S&P took a negative outlook on the US debt.

 

 Where does the does hurt start? The bond or stock market?

 

 Apoligies for my ignorance.

r101958's picture
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In my opinion....

Both.

dshields's picture
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not a good thing...

Not a good thing.  There will be ramifications to this.  This has been coming for a while.  After the circus in DC over the last month it became clear that we are unable to manage our nation's finances in a responsible way.  We needed to cut spending big time and we were unable to do it.  The repubs in the house tried and in the end they caved in to the pressure and did not force cuts.

I work for a major Wall Street company in the inter-bank FX market.  Basically we own the inter-bank FX market.  The system is down for maintenance right now.  It was shut down a little after 7:00 pm EST this evening.  It will be brought back up sometime tomorrow.  The major trading centers in Asia (Tokyo, Hong Kong, and Singapore) come on the system late Sunday afternoon.  I will keep an eye on this Sunday and report here legal info I can report about what happens, if anything interesting happens.  Personally I think interesting things are going to happen.

What I find interesting about this is there are a reasonable number of funds of various types that have as part of their charter restrictions on what types of debt they can own.  Some of them have the restriction they can only own debt instruments that are AAA rated.  This downgrade will result in them having to sell these instruments in order for them to remain within their charter.  This required selling along with panic selling may create a bad situation Monday in the markets.  If it gets out of hand the Federal Reserve probably will step in and start buying debt instruments in the open market in an effort to stabilize the situation.

We will see what we will see...

 

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Expecting the Unexpected

 Wall Street will make some serious money on this news. Everyone will be expecting treasury yields to rise because of this downgrade, but I think it is more likely that they will fall. Call it a "flight to relative safety".

From a sentiment perspective, the set-up for a major dollar rally couldn't be more perfect. Watch out for the old market headfake.

Jeff

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Debt Downgrade Comments

Let the finger-pointing begin. First, this weekend the Talking Heads set the stage for Monday morning finger pointers to start the blame game. Obambie will fire someone, T.G. would be my first choice, and a couple more may offer to go. It's just not in the DNA of politicians to cut spending. A full blown crisis is needed for these people to agree to take the required action. I'm not sure this crisis will be big enough to do the job. This whole thing was "planned" to take place when the bulk of DC is on vacation. Obviously the stock market knew this was coming and put it's price on it this week when we saw the "Debt / Budget Deal" go down. Big money got out this week, the little guys will take big losses next week when they panic sell and allow the Bigs to buy back in on the low end. More cash for the Hedge funds, etc... is the end result. Pension funds etc... can only own AAA so there is more opportunity for all the bottom feeders. This sort of thing just makes me sick to think about.
 

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Rob Z wrote: Let the
Rob Z wrote:

Let the finger-pointing begin. First, this weekend the Talking Heads set the stage for Monday morning finger pointers to start the blame game. Obambie will fire someone, T.G. would be my first choice, and a couple more may offer to go. It's just not in the DNA of politicians to cut spending. A full blown crisis is needed for these people to agree to take the required action. I'm not sure this crisis will be big enough to do the job. This whole thing was "planned" to take place when the bulk of DC is on vacation. Obviously the stock market knew this was coming and put it's price on it this week when we saw the "Debt / Budget Deal" go down. Big money got out this week, the little guys will take big losses next week when they panic sell and allow the Bigs to buy back in on the low end. More cash for the Hedge funds, etc... is the end result. Pension funds etc... can only own AAA so there is more opportunity for all the bottom feeders. This sort of thing just makes me sick to think about.
 

The dems clearly did not want to cut.  Obama said he would veto any bill that had real cuts in it, especially if it included a balanced budget amendment.  The dems just hate that.  I'm not sure why.  When I think about that it makes me crazy as it is smells like the dems want a disaster to happen.  But they are Americans also so why would they want America to have a disaster ?  Then you have the repubs - they could have forced cuts but they simply did not do it.  All they had to do was after they passed cut, cap, and balance was just lean back in their chairs and wait.  They caved in to whatever pressure was placed upon them.  I find this odd also as it appeared the pressure was from the people for the repubs to cut.  So exactly what hidden pressure were the repubs under ?  When I think about that very much I start to get crazy as some unknown pressure that was greater than the people was applied to them. That is the only way to explain why they did not force cuts.  They could have forced cuts and they just did not do it.  So, it was all pure crap.  The entire thing was crap.  They lie and they cheat.  Shame on them and shame on us for electing them.

If there is anything left of America come November 2012, every politician regardless of party that did not vote to cut should be removed.

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My Thoughts On The Rating Downgrade

Only Standard & Poor's has downgraded it to AA+. Moody's and Fitch haven't.

So like any lending institution that takes reports from TransUnion, Experian, and Equifax, they usually take an average or the highest. I suspect there won't be as big a move in mutual funds and pension funds based on this simple downgrade by S&P alone.

However, there may be a more psychological ("animal spirits") effect in the markets of this downgrade, and that's what we'll be watching for on Monday.

Personally, I think the rating should actually be BBB or lower. I base this on the Standard & Poor's rating scale:
http://en.wikipedia.org/wiki/Standard_%26_Poor%27s#Long-term_credit_ratings

But as the old Chinese saying goes, "A journey of a thousand li begins with a single step."

Poet

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re: not a good thing
dshields wrote:

What I find interesting about this is there are a reasonable number of funds of various types that have as part of their charter restrictions on what types of debt they can own.  Some of them have the restriction they can only own debt instruments that are AAA rated.  This downgrade will result in them having to sell these instruments in order for them to remain within their charter.  This required selling along with panic selling may create a bad situation Monday in the markets. 

dhields, interesting point!   So is Poet's comment on them potentially only taking the average or highest rating:

Poet wrote:

Only Standard & Poor's has downgraded it to AA+. Moody's and Fitch haven't.

So like any lending institution that takes reports from TransUnion, Experian, and Equifax, they usually take an average or the highest. I suspect there won't be as big a move in mutual funds and pension funds based on this simple downgrade by S&P alone.

Dshields, looking forward to whatever info you can share with us on Sunday!!

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Bloomberg - Debt Downgrade Comments

Video: 

http://www.bloomberg.com/video/73606936/

Aug. 5 (Bloomberg) -- Nouriel Roubini, chairman of Roubini Global Economics LLC, Joshua Rosner, managing director of Graham Fisher & Co. and Jim Bianco, president of Bianco Research LLC talk with Bloomberg's Michael McKee about Standard & Poor's downgrade of the U.S. credit rating to AA+ from AAA. Bloomberg contributor Christina Romer also speaks with Adam Johnson. (Source: Bloomberg)

 

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Warren Buffet said since the

Warren Buffet said since the US only owes money in dollars there is no danger of a default as it can just print as many as it wants. If that is indeed the case why haven't all countries with their own currencies got AAA ratings.

And what do the rating agencies know anyway?

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davidw wrote: Warren Buffet
davidw wrote:

Warren Buffet said since the US only owes money in dollars there is no danger of a default as it can just print as many as it wants. If that is indeed the case why haven't all countries with their own currencies got AAA ratings.

And what do the rating agencies know anyway?

You can not just keep "printing" dollars.  If that is the decision they make, and the may well decide to to that as they do not have a lot of options, then there is going to be a financial crisis.  It will cause inflation.  This has already started.  If you print enough dollars there will be hyperinflation.  In addition, if we do not act responsibly the world will lose confidence that we are able to manage our finances properly.  This loss of confidence has already started also.  It will drive the value of the dollar down compared to other currencies.  This will make our exports, such as they are, cheaper but it will at the same time make the things we import (i.e. oil) more expensive.   This will also tend to boost inflation.  At some point if we continue to act irresponsibility we will no longer be able to sell our debt at the low interest rates we can now.  As the interest rate we have to pay to sell debt rises the interest rate we will have to pay to roll over our current debt will also rise.  Higher debt servicing costs will eat into the government revenue stream needed to pay for such programs as social security, medicaid, food stamps (SNAP), section 8 housing, student loans, the military, agricultural subsidies (why do we have these), medicare, federal employee pensions, and many other federal government programs.  This will cause a national emergency and probably lead to violence if it becomes serious enough.

What would happen at your place if you just started borrowing money and spending it on non-productive things like food and gas for your car ?  At some point you would either max out your credit and nobody would give you any more or the cost to service your debt would eat up your disposable income then it would eat up the cash flow you needed to meet your fixed costs and you would suffer then go bankrupt.

Same story here just on a bigger scale.

 

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dshields wrote: davidw
dshields wrote:
davidw wrote:

Warren Buffet said since the US only owes money in dollars there is no danger of a default as it can just print as many as it wants. If that is indeed the case why haven't all countries with their own currencies got AAA ratings.

And what do the rating agencies know anyway?

Then again, Buffet just said there's no second recession and that the US should really have AAAA rating. I think he needs to increase his dosage of dried frogs pills.

http://www.bloomberg.com/news/2011-08-06/buffett-says-s-p-s-downgrade-mistaken-still-doesn-t-see-another-recession.html

Billionaire Warren Buffett said Standard & Poor’s erred when it lowered the U.S. credit rating and reiterated his view that the economy will avoid its second recession in three years.

The U.S., which was cut Aug. 5 to AA+ from AAA at S&P, merits a “quadruple A” rating, Buffett, 80, said yesterday in an interview with Betty Liu at Bloomberg Television. The downgrade followed the biggest weekly selloff in U.S. stocks in 32 months, with the S&P 500 slumping 7.2 percent to its lowest level since November.

I would agree with him on the second recession thing, but only because I don't think we're out of the first one yet. And judging by the increasing news of protests and violence I'm not alone.

Incidentally, just this week I've heard 2 interviews on the radio (here in London) where the subject is about financial and social collapse. This is a radio station that normally talks about what [insert "celeb" name here] wore last night and didn't [insert unknown person here] do well on X Factor last night.

Are people finally beginning to wake up?

 

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Money Printing...

The US is the ONLY Country that can "Print Money" with nothing to back it because we own the Reserve Currency (Dollars).

When we no longer have that - here is what happens: (Video below)

WARNING: THE FOLLOWING PRESENTATION
IS CONTROVERSIAL AND MAY BE
OFFENSIVE TO SOME AUDIENCES.

End of America - Viewer discretion is advised.

http://www.stansberryresearch.com/pro/1011PSIENDVD/PPSIM267/PR
 

 

 

ao's picture
ao
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gimme a break
Rob Z wrote:

The US is the ONLY Country that can "Print Money" with nothing to back it because we own the Reserve Currency (Dollars).

When we no longer have that - here is what happens: (Video below)

WARNING: THE FOLLOWING PRESENTATION
IS CONTROVERSIAL AND MAY BE
OFFENSIVE TO SOME AUDIENCES.

End of America - Viewer discretion is advised.

http://www.stansberryresearch.com/pro/1011PSIENDVD/PPSIM267/PR

This video has been posted here numerous times before and numerous times before it was established that it was blatant advertising for Stansberry & Associates, a group that I, personally, would not waste my money on.  Could we please, PLEASE refrain from posting this once again.  Nothing new here.

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Sunday Night

The wife and I have to go grocery shopping.  We will be back in a bit.  It is 4 pm EST now.  Asia gets busy around 6 pm EST.  Zero Hedge has the following article...

http://www.zerohedge.com/news/dollar-tumbling-record-low-against-swiss-f...

...which appears to be correct but I just checked and trading is very thin right now as it is early.  There is not enough activity to really establish a trend.  Spreads are wide but should tighten up when more people and machines come into the market.

I will be back later.

 

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7:15 EST

It is 7:15 EST and the inter-bank FX market is active in Asia.  However, there is nothing particularly amazing.  It is volatile but no landslide moves to report.

 

 

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thanks, dshields

Always good to have a knowledge-ready insider to explain what is going on.

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One hour into the Asia Market

                                   High                       Low                Current

EUR/USD            1.4431                     1.4290              1.4312

EUR/JPY               112.500                  111.500            112.000

USD/JPY                78.747                    77.600              78.290

EUR/CHF              1.0947                     1.0760              1.0910

USD/CHF               0.7634                    0.7490              0.7620

There is volitility for sure but that has been going on for several weeks, especially last week.

This one may come as a surprise to some people - this morning it takes 0.98 CAD (Canada dollar) to buy a 1 USD.  Canada money is worth more than US money.  Last weekend I was up in Vermont and at a toll booth there was a xeroxed sign in the window of the toll booth that said "Canadian money on a one to one with US money".  They were taking Canada money at toll booths in Vermont.  I do not often go to Vermont so I do not know if that is common practice or not.  I was just surprised when I saw it.

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Monday

The inter-bank currency market was not a major deal today.  Based on the volumes of the last few months we had an average day.  Last Thursday was a lot bigger day for instance.   It looked like all the action was in other markets.

 

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