The S&P Scare?

[kentuck]

It's in the headlines this morning. Even in international newspapers. The S&P rating because of our debt caused the stock market to drop yesterday. I am no expert on the stock market but I do consider myself an expert on getting screwed by big banks and our government. My instincts tell me to be wary of the correlation between the two.

We do know that the big banks lead the stock market up or down. Yesterday, some executive with Goldman Sachs was charged with a criminal act. Is it just possible that there could be more charges in the waiting and this could have caused the market to drop.

We cannot argue that the debt limit problem is not serious. Is it a "crisis"? Who knows?

However, it they are going to use it as an excuse to follow the "Gang of Six" and cut Social Security and other social programs, I would be even more suspect. Keep your eyes open.

[cutlassmama]

1. INteresting.

[BR_Parkway]

2. And S&P is credible again after all the AAA ratings they and the others

put on the junk mortgage securities? The people on Wall St are some of the most creative crooks on the planet - and the others who think they'll get wealthy putting their money there just blindly follow along. "Oh, S&P just said blah, blah, blah..."

[Jim__]

3. Exactly. S&P already has already proven itself to be a whore company.

Why would anyone care what they say about anything?

[hollowdweller]

25. Why has no news organization mentioned that????

I hear it being reported like God or something said we need to get the debt down and everybody is reacting.

I have yet to hear anybody mentioning that the fact that they really have a big role in the financial crises by nature of the fact that they totally screwed maybe even knowingly the ratings on the derivatives.

I mean I can't imagine the AP quoting Bernie Madoff about the economy so them reporting the S and P story without the caveat about their actual record on accuracy is sort of omitting something important.

It shows how much that our establishment unquestioningly accepts the biased opinions of the financial community which IMO is one of the least reliable and most reckless elements of our economy.

[Jim__]

28. It gets a little bit of a mention.

It gets a little mention in this AP story on MSNBC:

NEW YORK — News that Standard & Poor's was cutting its outlook on U.S. debt rattled financial markets Monday.

Cooler heads might recall that this is the same agency, along with Moody's Investors Service, that told investors that billions of dollars of securities tied to iffy home mortgages were safe bets — right before they collapsed and helped set off the biggest financial crisis since the 1930s.

...

But after mentioning it, they sort of sweep it under the rug.

[Thunderstruck]

29. I thought it was Moody's doing the scamming? Was S&P caught rating that

junk AAA too?

Who else? Memory failing me. I thought it was Moody's and Fitch.

[jeff47]

33. All of the ratings companies were doing it.

It's part of why nobody's seeing a jail cell. Everyone was doing it.

[Thunderstruck]

36. Then everyone involved should be in jail. Of course, our Justice Dept. is no

better than was the shrub's.

[EstimatedProphet]

4. Is it a scam? Maybe.

I know Cantor was howling about it within 5 minutes of the news coming out.

[txlibdem]

5. Just a convenient excuse to push the costs of their thievery onto the poor and middle class

If I see even 1% tax increase on the rich I'll be surprised as hell.

This is just one more excuse so the multi-millionaires in congress can save themselves by cutting benefits for the rest of us and they'll probably raise taxes and fees that mostly affect us, not them.

Government of the rich, by the rich and for the rich.

[badtoworse]

6. What we think of S&P is irrelevant

What potential lenders think about S&P's action and what Moody's thinks are hugely relevant. Moody's is OK for now, but that will change unless we take corrective action on our borrowing.

The world's view of our debt and the dollar is not good; in fact, it's going down the crapper. If we don't take steps to fix that, we will be in very deep shit.

[girl gone mad]

10. Japan has ignored dozens of ratings downgrades..

and so should we.

Why would anyone care what the company that gave Enron a "AAA" rating thinks?

[badtoworse]

12. Because the people who buy are debt still consider what S&P and Moodys say about it.

A downgrade will increase longer term interest rates and that will damage the economy significantly.

[girl gone mad]

22. No, they don't.

If they did, Japan would be paying much higher interest rates on its debt.

We have a sovereign fiat currency so it isn't actually necessary for us to borrow money in the first place and we could pay off all of our debts if we wanted to.

[badtoworse]

37. I believe there are several considerations in play

First of all, S&P, Moodys and Fitch provide assessments that purchasers of bonds use to determine how much they will pay for a given bond. In the end though, there is really only indicator that matters and that's the bond yield. The more risk that potential purchasers sees in a bond, the higher the yield they will want before they buy the bond. That is pretty elementary stuff. I also believe that bond prices (and by extension bond yields) are also driven by supply and demand considerations. Two bonds with the same ratings may sell at different prices because for some reason, investors want to be holding it.

In the case of Japanese bonds, you are correct - their current yield is substantially lower than US Treasury notes. As of yesterday, a Japanese 10 year note was priced to yield 1.245% while the current yield on 10 year Treasuries is 3.35%. Japanese debt is rated AA- by S&P while US debt is rated AAA by S&P. In my opinion, this is nothing to cheer about because it says that even though the US has a higher bond rating, investors are willing to pay more for Japanese debt. I would offer the following explanation:

1.) Investors have discounted the rating agencies, not for taking too negative a view, but for maintaining a very high rating when a downgrade is clearly in order.
2.) Investors are looking to diversify away from dollar denominated securities and the market for non-dollar denominated, investment grade securities is small.

If you take the view that our current fiscal policy is unsustainable in the long term (I believe you're delusional if you don't), then you have to consider what is likely to be done by our government to address the problem. I don't see much progress being made on that front: On one side, you have the Republicans saying no new taxes and cut social programs and on the other side, Democrats are saying tax the rich and cut military spending. We need to do all of these. but it appears that a stalemate is developing and without decisive action, we will reach a point of insolvency. This is not something a potential investor in US Treasuries wants to see.

Another consideration is inflation risk, the Fed's current policy is designed to produce some inflation (we are already seeing it) and it may be very difficult to contain once it starts in earnest. For that reason, many investors want to diversify their debt holdings by owning bonds denominated in a variety of currencies. In the case of Japanese bonds, they are, as noted, rated AA- by S&P which is still well within investment grade. I haven't gone through the exercise, but on an inflation adjusted basis, the yield difference Japanes debt and US debt may not be that great. Since the market for Japanes debt is much smaller than for US debt, prices are likely to be higher.

In any case, S&P's action should be a major wakeup call and the posters on this board that are just saying "fuck 'em" have their heads in the sand.

I'm an investor who's done reasonably well for myself, but I'm not a pro. If there are any professional bond traders reading this, I'd love to hear an opinion.

Edited to add: On your second point, it seems like you are talking about monetizing the debt. Read up on the Weimer Republic before you start down that road.

[jeff47]

24. To back up that assertion, you have to explain why Japan is still paying low interest rates

Despite many downgrades.

[badtoworse]

39. See Post No. 37

[jeff47]

41. Post 37 indicates you haven't spent more than a minute looking into it.

Japan has been running worse deficits than the US since the 90s. All your arguments in post 37 assume Japan has a smaller to nonexistent deficit.

[jeff47]

13. Do not fear the invisible bond fairies

After the S&P announcement, interest rates on US bonds went DOWN.

The "conventional wisdom" is that we're going to be doomed any minute now. This conventional wisdom is supplied by those who wish to destroy the safety net. Debt is just their current excuse to do so.

[badtoworse]

15. Yeah, I saw that too...

I'm not sure why that happened, but I would speculate that concerns over Greek debt may have driven investors into dollar denominated debt. That is a short term consideration and no, I don't believe we're doomed any minute now. In the longer term, however, we are screwed unless we make significant changes. The world is not going to continue buying our debt if we continue borrowing at current levels. That will trigger some very unpleasant consequences.

[muriel_volestrangler]

19. Or the bond markets had already decided on the risk

It's not as if S&P's announcement had any new figures or research in it; it was just their opinion on what was already well known.

I think it was S&P trying to get themselves a bit more credibility by saying that the US federal budget isn't perfect. Most people knew that already.

[jeff47]

23. So, keep fearing the invisible bond fairies?

The US benefits from it's position in the market. There are other advanced economies further in dept. For example, Japan (they're currently borrowing at 2-3%). So Japan can act as a canary in the coal mine. Given the tsunami disaster, they are going to go deeper into debt.

[badtoworse]

38. See Post No. 37

[jeff47]

42. See my other reply, where I inform you post 37 is wrong. (nt)

[Rage for Order]

32. The worst thing that would happen is we wouldn't be able to borrow any more money

And we would be forced to balance our budget. How is this a bad thing?

[Jim__]

35. It certainly should matter that Wall St finances have been exposed as a giant scam.

If financial institutions continue to invest Wall St with undeserved credibility, it is worth asking why. We know that Wall St will slant the news to increase its profits. This known fact should play into any evaluation of information coming from that sector.

[melm00se]

7. the concern is valid

the current policy of borrowing to finance government operations AND the "printing" of money create a double whammy.

the interest payments on the debt (even with some of the lowest interest rates on record) are increasingly burdensome.

the increase in money (faster than the growth of the economy) is going to eventually trigger an inflationary spiral (as it historically always has).

Inflation is "good" for debtors but "bad" for creditors. Eventually creditors will begin to demand a higher interest rate to lend (to offset not just the inflation rate but also the increasing risk of default - - and yes that is still a possibility if things get too bad).

As goes the interest rates the government pays to borrow so does the interest rate for other kinds of lending and there is a direct relationship between interest rates and economic growth.

While you can say that S&P is, in may cases, full of shit, I think that this time, like a broken clock, are right twice a day.

we are approaching a point where tax increases are not going to be the only solution, it will require significant spending cuts as well in an effort to correct this situation.

Personally I would support a 20-30% cut across the board (defense and social programs) if it would correct the situation and start us back down the path towards solvency.

[badtoworse]

8. +1 and highly recommended. You are 100% correct

Edited to add: There is also the risk that the world stops using the dollar as a de facto reserve currency. That would also have huge consequences for our way of life as the cost of imported goods (like oil) would likely soar very quickly.

[jeff47]

14. Your analysis applies to normal times

We are in a liquidity trap. Thus economics doesn't work the normal way. We need inflation right now to get away from the 0 bound on interest rates.

[hollowdweller]

27. That's what they want you to want.

Just saying.

[notadmblnd]

9. and John Fund is on C-SPAN telling everyone we must become more competitive pronto

[NuttyFluffers]

11. guess the 'too big to fail' are gonna fail regardless.

so might as well save our taxpayer money and spend it on ourselves. :)

(might as well push that meme to its logical conclusion, no?)

[fasttense]

16. This is just too convenient for RepubliCONS.

RepubliCONS have ginned up this debt apocalypse. The US has carried higher debt as a percentage of GDP in the past, especially when we have been at war. The Democrats were starting to get tough with Obama's speech about the rich needing to pay their fair share. Then lo and behold the S&P sounds a warning about US debt.

Aside from the abysmal track record at rating stocks and bonds, the S&P had no problems when Raygun and the bushes ran up the debt - lifted the debt ceiling by $4 Trillion. No warning or downgrade back then. But now, when the RepubliCONS are trying to prevent government from working or spending, the S&P is suddenly concerned about the debt.

It is very suspicious and nothing more than a political maneuver to scare the Democrats into doing what the RepubliCONS want.

People act as if the S&P is NOT owned by the very same people who own the RepubliCONS.

[badtoworse]

18. Do you think potential creditors will share your opinion?

[Odin2005]

21. I thinks those "potential creditors" should be hanging from lampposts.

[spanone]

17. yesterday joe klein called it a political move by s&p

[Odin2005]

20. I fucking hate these capitalist parasites.

[Thunderstruck]

31. So, what are you going to do about it?

[DainBramaged]

26. The S&P rating is a phony as gas prices

[Thunderstruck]

30. When I go to fill up my vehicle with gas, there is nothing phony about the price. I promise you.

[DainBramaged]

40. I left off the word scam

[tjwash]

34. Fuck them...

...these are the same bastards who deliberately mis-valued all the derivative funds in order to funnel hundreds of billions of dollars into the pockets of Wall Street criminals, are now they making prognostications to affect a political process that---wait for it-- has the power to funnel hundreds of billions dollars into the pockets of Wall Street criminals after they sufficiently cow the repugbaggers into submission.

Moodys--S & P---and the rest of the mega-bank scare mongers can kiss both sides of my bloated, hairy, white, pimpled ass cheeks. Their credibility among serious investors is about on the same level as Paris Hilton after a 2 week coke-bender.