Rating Agencies

Guest Post: The Market From The Eyes Of An 8 Year Old

After two incredibly volatile weeks, where more Americans now know the ticker symbol for Gold (GLD) than its Periodic Table Symbol (AU), I'm just not sure what to write. Trying to make sense of it all is hard enough, and by this time on a Sunday, what hasn't already been written? I guess I could have tried to write something title "Circular reasoning and cognitive dissidence in the markets" , but that seemed fairly complex. Instead, maybe looking at the past couple of weeks through the eyes of a child, is a better idea.

Big Miss In French GDP Puts Further Pressure On Its AAA Rating According To Analysts

Earlier today, Europe's fulcrum economy - France - whose AAA rating is all the matters for continued European solvency, as a downgrade would effectively derail the EFSF even before its launch as Zero Hedge has discussed extensively in the past, reported Q2 GDP which not only missed consensus estimates of 0.3% growth, but plunged from Q1's 0.9% down to unchanged or 0.0% for Q2. The worry here is that, as Market Watch observes, "France’s economy, the second largest in the euro zone after Germany, recorded no growth in the second quarter, heightening concerns about the nation’s ability to achieve its deficit-reduction plan. The consumption expenditure of households slumped 0.7% in the second quarter, hurting GDP growth, INSEE said. Imports fell 0.9%, while exports were flat after growing 1.8% in the first quarter." And as those who have been following it know, the only reason why the rating agencies have not touched France's hallowed AAA-rating is due to their expectation that France will have no problem implementing a deficit-reduction plan which will then cut French debt. Alas, following this number which post revision could mean that France has re-entered a recession, concerns about the AAA rating, which is what set off this week's avalanche of fears about SocGen and all other French banks, are set to spike once again. “The flat outturn will not fit well with the current debate we are seeing around France and its ability to retain its triple-A credit rating,” said analysts at FxPro in a note. He was not alone to speculate about the linkage between GDP and rating: "today’s disappointing 2Q GDP data may well reignite" concerns about France’s ability to implement fiscal austerity necessary to maintain AAA rating, also said Daiwa’s Grant Lewis. In this market, which is desperately looking for things to be paranoid about, we expect that this could well become the next big meme, especially with all of Europe slowly rolling back into re-recession once again.

2008 Redux

Since this morning’s rant or comment, I have been informed of several other similarities...

Guest Post: The Best Looking Horse In The Glue Factory

The politicians and bankers who control the developed world have made the choice to print money and create more debt as their solution to an un-payable debt problem. Europe, Japan, the U.S., and virtually every country in the world want to dev.alue their way out of a debt problem created over the last forty years. It has become a race to the bottom, with no winners. Every country can’t devalue their currency simultaneously without blowing up the entire worldwide monetary system. But, it appears they are going to try. The United States will never actually default on its debts. Ben Bernanke will attempt to default slowly by paying back the interest and principal to foreigners in ever more worthless fiat dovllvvars. This will work until the foreigners decide to pull the plug. For now interest rates are low and the U.S. is the best looking horse in the glue factory. But we all know what happens to all the horses in the glue factory – even Mr. Ed.

smartknowledgeu's picture

First, concentration does not equal risk though the commercial investment industry really wants all their clients to believe this rubbish concept. Second, corrections in gold and silver, though they are very frequently sold by the commercial investment industry as the “bursting of the precious metals bubble”, are just that – corrections, and additionally buying opportunities to accumulate more physical, when they happen. Not owning a single ounce of physical gold and physical silver in this environment is absolute insanity.

Muni Market Prepares For "Hundreds And Hundreds" Of Downgrades Tomorrow

While the impact on Treasurys as a result of the downgrade may be limited (after all the other side of the Atlantic is about as ugly as the US, so where could $8 trillion in marketable USTs practically go... at least for now), the same may not be said about the far smaller, $2.9 trillion municipal market, which is about to see a blanket downgrade tomorrow as S&P warned on Friday night, and of which Matt Fabian of Municipal Market Advisors earlier said that "There will be hundreds and hundreds of municipal downgrades, which will not do well to bolster investor confidence." The scary bit: "Treasuries may be able to shake off a real impact from the downgrade. Munis I’m less sure about." Indeed, with futures already trading, and most risk assets experiencing a brief knee jerk reaction on a global coordinated PPT response by the G-7, there is still little clear understanding of what will really happen to not only the traditional system but to shadow liabilities such as repos and money markets. And munis are just one part of all of this. So what will happen if tomorrow the muni market starts unravellling, as Whitney, among so many others, has predicted? For that we turn to JP Morgan's Peter DeGroot for some quick observations.

EconMatters's picture

U.S. Should Downgrade S&P

Washington probably had it coming by handing S&P one necessary ammunition--the Political Soap of the American debt ceiling debate, but on the other hand, I would not give that much credence to S&P’s claim that “it's our duty to make that call" either.

QBAMCO's Take On The US Downgrade

It is still not too late to submit one's thoughts of what the US downgrade means for various asset classes and for the economy, and world, in general. Here is one of the few worth reading, courtesy of QBAMCO's Paul Brodsky and Lee Quaintance. Their conclusion: "the downgrade is effectively a currency downgrade, which seems very reasonable, overdue and, in real terms, insufficient. We would argue that in real terms, US Treasury obligations are non investment-grade. We think Treasury obligations today and always will be money-good, but principal and interest will be repaid with bad money."

Citi Battens Down The Hatches, Prepares For Global Risk Offness In A Few Short Hours

Citi's head FX guy Steven Englander is barely back to the US, and already is pouring the daily dose of fire and brimstone (much deserved) into a market that after nearly 2.5 years of unprecedented complicity, is about to realize that every escalator action has an equal and opposite express elevator reaction (oh, and those same HFTs that make money in an upward momentum environment, are just as effective at putting a minus sign in front of all their signals, wink wink). Some key soundbites from his just released note on what to expect (spoiler alert: nothing good): "The accelerated timing is a surprise and comes at a point at which global market sentiment is extremely weak, so it seems more likely that the reaction in markets will be negative than positive" ..."there may be concern in FX markets that the EUR AAAs are not solid, given the political and economic issues facing the euro zone and how conditions have worsened since the agencies last commented on ratings"..."a downward shock to markets is likely to be USD positive in the near term. This is hardly USD positive once things settle down, but before they settle down, the short term will likely dominate the long-term"..."The odds are that the week will start with FX investors challenging the SNB and MoF to intervene in size"... most importantly, why Europe is sweating bullets after the last bailout attempt announced from Friday has now gone up in flames and the EFSF is seen as being on edge of functionality: "In terms of FX market impact, the biggest would come from a downgrade of one of the AAA eurozone countries who back the EFSF’s AAA rating. This would mean either dropping the EFSF AAA or increasing the contributions of the remaining AAA."and on the topic of everyone's most favorite Federal Reserve: "A Fed response is likely to emerge only if there is turmoil in markets." And here we were warning anyone who cared to listen that the Fed needs a 25% correction before QE3 comes. Well, you may just get it very soon.

Guest Post: Equities In Dallas And Sovereign Debt Ratings

“Equities in Dallas” was the worst job a trainee at Salomon brothers could get. I have to believe that the G-20 sovereign debt rating group was the equivalent at the rating agencies. It wasn’t volatile and sexy like Emerging Markets. It had nothing to do with the core business of rating corporate debt. It had even less to do with the fast growing structured product business. It must have been a pretty dull place to work. I think that is important because it means, certainly at this stage that all the decisions on sovereign debt are being made at a very high level within the rating agencies. Someone isn’t running some numbers and coming up with a rating proposal. Some people are sitting around in a room, trying to figure out what rating they want to give, or need to give, or can get away with giving. Knowing that these decisions are being made at the highest levels of the firm and have nothing to do with what any analyst in the area says or does is important in trying to figure out where the ratings go next.

As Treasury Continues Childish Sniping At S&P While Losing Credibility, Investors Lose Sleep

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.

PIMCO: "U.S. Downgrade Heralds A New Financial Era"

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.