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On the S&P Downgrade and further volatility
Yes, the rumor The Trader wrote about yesterday proved right. S&P is downgrading the US, despite many well respected pundits saying that was impossible. Interesting times ahead to continue. Although S&P’s timing is not the best, both for market volatility and their popularity, some of the effects are priced in.
Expect more volatility, as risk has been mispriced for several years. As we have written during the spring, too many young quant academics have been pricing risk looking back at Garch etc models, and giving the past year’s low volatility environment way too much weight. It will take time to rinse out all these wrongly priced risk. For more reading on volatility, check (once again) this year's best vol report, Broken Volatility, not any more…
From Bloomberg,
Standard & Poor’s downgraded the U.S.’s AAA credit rating for the first time, slamming the nation’s political process and criticizing lawmakers for failing to cut spending enough to reduce record budget deficits.
S&P lowered the U.S. one level to AA+ while keeping the outlook at “negative” as it becomes less confident Congress will end Bush-era tax cuts or tackle entitlements. The rating may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt, the New York-based firm said yesterday.
Lawmakers agreed on Aug. 2 to raise the nation’s $14.3 trillion debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years, less than the $4 trillion S&P had said it preferred. Even with the specter of a downgrade, demand for Treasuries surged as investors saw few alternatives amid concern global growth is slowing and Europe’s sovereign debt crisis is spreading.
“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said in a statement late yesterday after markets closed.
Full article, click here.
Expect war between the Fed and the S&P. First comments from Fed below. QE3 imminent?
From Dow Jones,
Standard & Poor’s downgrade of the U.S. government’s debt will not affect the risk-based capital requirements for U.S. banks, federal regulators said Friday evening.
The Federal Reserve, Federal Deposit Insurance Corp. and other federal banking regulators said in a statement that the lowering of the U.S. government debt rating from AAA to AA+ “will not change” the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government or government agencies.
“The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected,” the regulators said.
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So what does this mean for the markets short term and long term? If the bond shell game becomes the only game in town I see a lot of folks simply walking away before this all has to all be dealt with at the international level. Short term, is everything going to get crushed until more American QE begins in earnest (look everyone is doing it, just a matter of what everyone's printing velocity is relative to eveybody else) comments please.
Printing money is starting to have diminishing returns. Eventually interest rates and lower currency rates solve the problem. BUT, with most everyone in the same boat, maybe the boat sinks.
but Boehner and Obummer said the deal they struck was not to worry the markets ...clearly the markets, and S&P, thought he was talking absolute shit
...so when do the two goons reverse the deal??
It's not the economics of the AAA rating that matters and the scary thing is TPTB know this. It is just one more chink in the armor of americanism that the government has allowed to occur because they are all corrupt and could care less about people. These assholes will of course blame each other, George Bush, the Tea Party, too much pork, not enough taxes.....and the band will play on as the Titanic sinks!
I don't normally comment on here, but read this site avidly as it is the only place that seems to actually have any relevance.
Now to the point. Is this ratings downgrade a way of blaming the tea party movement for the debt debate shennanigans and destroying them as a pollitical force? I am a UK resident so have no affiliation to any US party or movement. Just seems the timing of this downgrade could cause the tea party movement huge problems.
If you read the rationale for downgrade listed on the S&P release, you could make a case that they are blaming the Tea Party. They point to increasingly dysfucntional American politics as part of their reasoning.
OTOH, they say that the US didn't go far enough with cuts. Well, without the Tea Party it would not have gotten as far as it did.
People will read into this what their own biases and dilusions want to see.
Already seeing what is written from around the world one can tell that the Tea Party is more a part of the answer than they are a part of the problem.
Hearing lots of anger directed at the tea party over here in the MSM concerning the downgrade. Both from citizens and and representatives. Without exception, their answer is to borrow more. WE have truly become too stupid to survive. Its sad and maddening all at the same time...
I keep going back and forth on whether this will guarantee QE 3 or make QE 3 politically undoable.
there is an argument to be made for either scenario.
I'm in the "No QE 3" preference camp. I think forced ( or artificially manufactured inflation) does nothing positive for the overall economy or for the long/big picture.
I believe we need a period of prolonged deflation in order for the markets, be it real estate/stocks/goats/whatever, to find their true levels. then, and only then, can things begin to improve.
And yes...the Debt must be addressed. I'd start with ending the wars, cutting military spending, closing overseas bases, reducing aid to other nations and a more reasonable tax policy before setting the sniper scope on Social Security, Medicare and Medicade. My reasoning for this is simple: Targeting those last three items only further burdens those most already burdened.
There's more to be said on this issue and there are no simple solutions. But just because it isn't simple doesn't mean it should be avoided.
We do live in interesting times. At least we've got that...right?
I look at QE3 this way.
1. The USG has just voted itself a lovely new $2+ trillion debt limit extension
2. The $2+ trillion is supposed to last through 2012 but that estimate was based on some heroic economic growth figures that are simply not going to be achieved - the Q2 GDP and Q1 downward revisions make that clear. The US will be trying to sell much more than $2trillion new net debt between now and end 2012. Count on it.
3. S&P has just downgraded US debt, reflecting a growing distaste among creditor countries for US Treasuries.
4. The Treasury cannot afford to increase yields to make the debt more attractive. If they do, they risk accelerating the debt spiral they are already trapped in.
So. If The Bernank keeps his printer on standby and does not stand ready to soak up the USTs that the Primary Dealers are obliged to buy but will have huge difficulty selling onward - who will buy all these trillions in new debt? Nobody.
It is possible that the current stock market declines and the Euro difficulties will have a short-term effect of driving some money into USTs. Problem is that the Treasury needs at least a decade of massive demand for it's debt and that money just doesn't exist. Ben will have to print it.
QE3,4,5,6,7..... are guaranteed.
Remember, BHO said that the deby limit must be raised because we had already spent the money. Only, none of the LSM or anybody elase asked him then why did he need $2.4T to include FY12 funds. No FY12 $ have been appropriated. Also, for FY11 and the omnibus spending bill in March, not all of the appropriated funds had been committed or obligated, only approximately 5/6th.
Once Congress appropriates funds in a budget, and the President signs that act, the funds are doled out by the OMB based on a spending plan by each agency in the 13 appropriation bills (normally) or in the one big omnibus spending bill.
At each Agency, before funds can be obligated, a financial officer must certify that he has the funds in hand before they can be obligated or committed.
Therefore, if the debt ceiling had not been raised, then the remaining appropriated funds could not be spent unless corresponding $ could be found from to offet the required lending from the SSTF, the CSRetirement funds, etc.
No FY 12 funds could be spent above income.
Therefore, the only reason to increase the debt level was to further BHO's grand scheme to bankrupt the USG. Only, I think he thought he could postpose the downgrade and defaulting until 2013 and if he was re-elected and the demorats retook the house, he could essentially nationalize everythng to make the interest payment to his commie and mussie friens, fu*k American pension funds
Remember, BHO said that the deby limit must be raised because we had already spent the money. Only, none of the LSM or anybody elase asked him then why did he need $2.4T to include FY12 funds. No FY12 $ have been appropriated. Also, for FY11 and the omnibus spending bill in March, not all of the appropriated funds had been committed or obligated, only approximately 5/6th.
Once Congress appropriates funds in a budget, and the President signs that act, the funds are doled out by the OMB based on a spending plan by each agency in the 13 appropriation bills (normally) or in the one big omnibus spending bill.
At each Agency, before funds can be obligated, a financial officer must certify that he has the funds in hand before they can be obligated or committed.
Therefore, if the debt ceiling had not been raised, then the remaining appropriated funds could not be spent unless corresponding $ could be found from to offet the required lending from the SSTF, the CSRetirement funds, etc.
No FY 12 funds could be spent above income.
Therefore, the only reason to increase the debt level was to further BHO's grand scheme to bankrupt the USG. Only, I think he thought he could postpose the downgrade and defaulting until 2013 and if he was re-elected and the demorats retook the house, he could essentially nationalize everythng to make the interest payment to his commie and mussie friens, fu*k American pension funds
wrongly priced risk... What ? there is no risk fool, BTFD !!! This is amerika we do big things, no one's going to jail, and huge bail outs are guaranteed for CB the world over. Riding this unicorn over the rainbow ! Once the blood suck squid replaces Timmmmaaahhh with Jon Corzine, it's to infinity and beyond. wwwaahooo house of pleasure ! OMFG
Another round of bailouts may be in the cards. Maybe. Maybe not.
The "Too Big to Fail" crowd is suing themselves, being sued by the investors, and being sued by the bottom of the Ponzi food chain.
JPMorgan Attempts Takeover of FDIC?
"JPMC cannot prove that it is the successor in interest to the FDIC under Rhode Island Law."
"For these reasons, I demand that the foreclosure sale set for August 9, 2011 be cancelled. Your failure to do will result in the filing of a lis pendens, a complaint for declaratory relief, compensatory damages and punitive damages based upon criminal conduct."
"I look forward to an immediate response."
Ha! You CAN put pinstripes on pigs...but they are still pigs!
http://www.huffingtonpost.com/robert-l-cavnar/sp-downgrade-tea-party-wi_...
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the Tea Party, have finally succeeded in another step in their quest to wreck the US economy, oddly believing that it will help them win the 2012 election. Their slash and burn, no-revenue dogma that won out in the manufactured debt crisis that came to a head last Monday failed at the one goal it should have set for themselves; that is, to calm the markets and provide assurance of the strength of the US economy. Their 24/7 assault on the economy and job recovery, all in the name of taking down the President, only succeeded in inflicting the damage that business leaders, banks, and the Treasury begged them not to do.
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no the ratings agencys and globalist banking cartels fault US economic and security fundementals on you bitchez
Everybody:
Don't look for the real causes, look for scapegoats!!!
Are you an asshole Nah, 'cause you talk like an asshole? The Tea Party position is not "no new revenue", but instead, NO NEW TAXES. Your hero's have spent $5,000,000,000,000 more than we had, in just the past three years. Before you chalk it up to the Iraq/Afghan wars, better peek at the CBO chart, showing the deficit with and without the wars. However, I am dissapointed in the Repubs, for not rolling Federal spending back to 2008 levels, prior to this disgrace in the WH, pissing our money away to his cronies.
Politicians are ALL the same breed. Be it "Tea Party" or "Republicans" or Democrats" or whatever.
Once they get you pointing fingers in the direction they want you to point fingers, you become no more relevant than a drunken idiot with face paint and no shirt on in sub zero temperature at a stadium screaming for "your team" to kill the other guys. They managed to make you forget that the $50 per ticket and $10 per beer you are spending is going in their pocket. What you get is a sore throat, frostbite and a hangover. Does that sound like a good deal to you?
Best analogy for our political process I've heard in a long time!
+1 to you
Maybe. I truly believe that a much larger game is being played though. Any sincere, even half assed analyst would pick up on the larger game which is globalization. Consolidation of power. The USA had to go.
And it is almost gone.
I too get a very strong feeling there's a larger game being played out here. Believing the S&P is the mouse that roared is a quaint fairy tale
but reality may point to a more sinister plot.
Translation. "Come hell or high water, we're gonna keep those bond rates right the hell where they are. Full speed ahead! Damn the torpedos and commodity prices! We need more ink!"