Today at about 4 pm, the Treasury's John Bellows issued a hastily written statement, in which he explained why in his view, a day after a historic downgrade of its debt, the $2 trillion mistake that S&P made "raises fundamental questions about the credibility and integrity of S&P’s ratings action." What is ironic is that in the explanation, it is the Treasury's own credibility that is put at stake. Supposedly the reason for the mix up is as follows: "S&P incorrectly added that same $2.1 trillion in deficit reduction to an entirely different “baseline” where discretionary funding levels grow with nominal GDP over the next 10 years. Relative to this alternative “baseline,” the Budget Control Act will save more than $4 trillion over ten years – or over $2 trillion more than S&P calculated. (The baseline in which discretionary spending grows with nominal GDP is substantially higher because CBO assumes that nominal GDP grows by just under 5 percent a year on average, while inflation is around 2.5 percent a year on average." So let's get this straight: the Treasury department is kicking and screaming at S&P for daring to downgrade the US, when it is using as its baseline a forecast prepared by the same CBO which back in 2001 predicted a net negative debt balance by 2008 (!), and which in the same year expected 2011 US GDP to be $16.9 trillion, and a budget surplus of about $1 trillion, putting any S&P forecast from the peak of the credit bubble, to shame, but far more importantly, Bellows, and his plethora of bosses, is pissed that the S&P did not use a baseline that assumes a 5% GDP annual growth, when current annualized GDP, 2 years after the end of the recession, is under 2%? And this is what is supposed to make S&P less than credible? This is like the pot and the kettle having commenced global thermonuclear warfare.
The first official demand for a change at the top as a result of the S&P downgrade has come in, courtesy of Indiana State Treasurer Richard Mourdock, who has just demanded the head of the most incompetent and tax evading Treasury Secretary in US history, on a silver platter. "President Obama should fire U.S. Secretary of the Treasury Tim Geithner over the debt downgrade. If Obama won't remove him, then the US Senate should withdraw its consent of Geithner's appointment to U.S. Treasury because someone in the White House needs to be held responsible for this disaster." Zero Hedge fully endorses this perspective.
Emergency Meetings Galore: ECB To Hold Crisis Conference Sunday, G20 To Hold Call At 2230 GMT TonightSubmitted by Tyler Durden on 08/06/2011 - 13:43
For a world that has supposedly largely priced in the US downgrade, the amount of emergency conference calls this weekend is a little disturbing. First, tonight at 22:30 GMT the G20 deputy finmins will hold a conference call It to "exchange of information and opinions." Next tomorrow sometime the ECB will hold a separate call in "response to the latest developments in the euro zone's debt crisis, an ECB source said on Saturday." Somehow we think the tangential topic of the historic US downgrade may also be breached. And, as always, the market is sure to be delighted with the outcome of this latest political hodge podge of responses to what is increasingly shaping up like a market perfect storm of epic proportions.
Like clockwork, the Wall Street reactionaries confirm that when it comes to predicting the future, and/or actually having a proactive stance, one better look elsewhere. In responde to last week's 10% correction, first Goldman's economics team downgrades the economy and floats its demands for the SS QE3, next its FX teams downgrades the USD, and finally Joseph Cohen replacement David Kostin cuts his price target on the S&P. To wit: "We reduce our year-end 2011 price target to 1400 from 1450 and our 2012 EPS estimate to $102 from $104, due to lower global GDP growth estimates. Our 2011 EPS estimate remains unchanged at $96. S&P 500 trades 12% below its April peak and has experienced its 15th correction of at least 10% since 1975 reducing the forward P/E to 12.0X our top-down EPS estimates and 11.3X consensus bottom-up estimates. Current valuation is consistent with support levels in October 2008, July 2010 and our uncertainty-based P/E fair value, suggesting further risk is more likely reliant on negative earnings revisions than further multiple contraction." We can only hope that at least someone knows what Wall Street's sell side is paid millions of dollars for. Alas, it is not us.
It Just Went From Bad To Far, Far Worse As Germany Says Italy Is Too Big For EFSF To Save, Refuses To Carry Euro Bailout BurdenSubmitted by Tyler Durden on 08/06/2011 - 12:20
Remember when we said (yesterday) that Germany will soon balk over the fact that it is pledging its entire economy to bail out an insolvent Europe? Well, that moment has come.
- German Govt: Italy Too Big For EFSF To Save - Spiegel
- German Govt: Doubts Whether Tripling EFSF Would Help It Save Italy
- German Govt: Italy Must Make Savings, Reforms To Exit Crisis - Spiegel
- Italy Debt Guarantee Could Raise Doubts Over Germany's Finances - Spiegel
- German Govt: EFSF Should Only Help Small, Mid-Size Countries - Spiegel
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.
Gloating China Says "Has Every Right To Demand US Address Its Debt Problem", Asks For New Global Reserve CurrencySubmitted by Tyler Durden on 08/06/2011 - 11:21
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."
Presenting the joint statement by The Fed, the FDIC, NCUA, OCC. In essence: the Fed tells S&P to go fornicate itself. And for your corresponding pleasure, below are the media contact of note: Federal Reserve Susan Stawick (202) 452-2955; FDIC David Barr (202) 898-6992; NCUA David Small (703) 518-6336; OCC Bryan Hubbard (202) 874-5307
Peter Barnes “Is there a risk that the United States could lose its AAA credit rating? Yes or no?”
Geithner’s response: “No risk of that.”
“No risk?” Barnes asked.
“No risk,” Geithner said.
Well, so much for the conspiracies. S&P has just released a scathing critique of the total chaos that this country's government has become. "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability." What to expect on Monday: " it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021." And why all those who have said the downgrade will have no impact on markets will be tested as soon as Monday: "On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors." Translation: unpredictable consequences: you are welcome!
McGraw-Hill: meet Chicago-style negotiations. And there, in one sentence, is all that is broken with this country. The reason for the beyond ridiculous horse trade, according to CNN: S&P analysis of U.S. revenue, deficit picture was questioned. Presumably S&P ignored to add the $10 quintillion dollars that were saved by America not declaring war on Tatooine and its most infamous Hutt resident: Larry Summers. Indeed, again according to CNN, S&P acknowledged some errors in its analysis. Isn't it amazing what being threatened with having your NRSRO license can do for motivation to double check your work, eh you pathetic sellouts? Who would have thought that last week's farce debt ceiling would continue and develop into a national pastime. Below, for the sake of S&P's non-existent conscience and incompetence, are their own guidelines for what constitutes an AAA-rated credit. Readers can decide if the US is one. In other news, in USSAAA, government downgrade rating agency.
With a last-minute debt deal reached, I’m reminded of two holy words in Washington: “compromise” and “bipartisanship.” It’s amazing that the political elite have so twisted the English language as to lend virtue to these terms. In Washington, these words hold intrinsic value… similar to how “truth” and “honesty” do outside D.C. Unfortunately for the American public, Washington compromises have been and will continue to be the death knell of the U.S. economy – and particularly the free market.
Think you were the only one who could not get within 100 feet of any liquidity in today's market which bounced up and down by 5 points on any chatic whim? Think again. The day after the market saw 844 stocks trigger short-sale restrictions (meaning they dropped more than 10% in one day), not even the robots were able to pull a rabbit out of a hat and at least 21 stocks ended up flash crashing for a millisecond or much longer during today's trading session. Below are the charts of the 21 identified victims of overzealous ask-side algos, as usual courtesy of Nanex.