Archive - Aug 6, 2011

Those seeking a harbinger of what may be in store for global capital markets come Sunday 5 pm should look to Saudi Arabia where the Tadawul just dropped by over 5% today.

Time for deeply introspective Op-Eds galore. Not too surprisingly, the first one comes from blogging powerhouse Pimco, and its chief literary superstar, Mo El-Erian, titled "U.S. Downgrade Heralds a New Financial Era." While Mohamed's outlook is mostly politically correct fluff, he does bring up the absolutely spot on point that FrAAAnce is about to become FrAAnce, which also means that Germany's worst nightmare: that of backstopping the EFSF entirely on its own, is about to become reality.

China has released a scathing op-ed in Xinhua, the official Chinese news agency, in which the authors waste no time to humiliate a "debt-ridden Uncle Sam" following the S&P downgrade, in the most violent surge in the recent war of words between the ascendent and descendent superpowers. Some choice selections: "Dagong Global, a fledgling Chinese rating agency, degraded the U.S. treasury bonds late last year, yet its move was met then with a sense of arrogance and cynicism from some Western commentators. Now S&P has proved what its Chinese counterpart has done is nothing but telling the global investors the ugly truth", "China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets." It doesnt stop there, "[the US] should also stop its old practice of letting its domestic electoral politics take the global economy hostage and rely on the deep pockets of major surplus countries to make up for its perennial deficits." China takes the opportunity to give the US a little lecture on a broken way of life: "All Americans, both beltway politicians and those on Main Street, have to do some serious soul-searching to bring their country back from a potential financial abyss." And lastly, China once again gets back to its pissing contest about whose reserve currency is bigger: "International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country." Just wild fun. Read the whole thing below.

The same day Jan Hatzius downgrades the US economy, and David Kostin cut his S&P target (more on that in a second), the US was downgraded. So, to keep it all in perspective, here is Goldman's explanation of what the downgrade means, and why ignoring the rabid elephant in the room is probably a good idea. "BOTTOM LINE:  Standard and Poor’s has downgraded the US sovereign rating to AA+, and kept the rating outlook at negative, suggesting improvement in the fiscal situation will be needed to avoid further downgrades.  Federal agencies have issued guidance clarifying that this action will not affect risk weightings for US Treasury or agency debt."

What to make of this? My thoughts.

Volatility and mispriced risk for years to haunt investors after S&P Downgrade