On the S&P ratings move

Bruce Krasting's picture

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Sun, 08/07/2011 - 01:18 | 1532250 Mediocritas
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I moved to cash at the end of May. Maybe it was a bit early, but I didn't lose sleep over it. Have to say though that I didn't do it because I thought there would be a downgrade, I did it because of Europe. This downgrade came as a complete surprise and the timing is very....interesting (given events in Europe). I know the Fed says to ignore any effect on risk weighting, but will the market actually respect that?

All I can think of is that there are some pissed off people up high at S&P and they chose this timing deliberately to inflict as much pain as possible on their opponents (particularly DC). Power to 'em I say, it's about time.

Sun, 08/07/2011 - 13:22 | 1533024 MsCreant
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This is just a thought, an idea. What if they chose to put this news out there now so that it would not be the only thing being focused on? In other words, it had to happen so they do it under the cover of all the other bad news coming out. Their sore thumb sticking out is not as shocking if other sore ones are out too.

Sat, 08/06/2011 - 21:04 | 1532078 lurkette11
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Thank you to 11b40 and frobn. I much prefer Walter McDougall's take, "Sustaining a Republic of Hustlers." Why the libertarians on this website think life will be better with small government or no government escapes me, I guess because they think they'll never be touched. In a way, I am ready for their plans because I think they will be absolutely terrified to live in a country where money does not mean anything, since their edifice is built exclusively on faith in money. I also think they live in a delusion if they think they will never suffer. Austerity - I know about austerity. You who believe in von Mises and the doctrines of the Chicago School of Economics - you could never live at their brunt. Dare you! (Why did Indiana have to once again draw attention to itself, a state with one of the lowest proportions of higher-educated citizens - another part of the libertarian/Chicago School plan - education only for the richest - but oops! what will we do if money won't pay for it? Geithner may be bad, but wait till you see who comes next ...)

Sat, 08/06/2011 - 19:53 | 1531962 boiltherich
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I have been saying for years this unfunded liability bullshit we keep hearing about is a strawman, there is no unfunded liability just the projected refusal to fund what must be funded, and it will be funded.  For one thing as you sort of point out it is not allowed under the rules of accounting to mismatch cash accounting with accrual accounting, use one or the other but not both, and government has to be cash basis because accrual would simply allow both elected and unelected people to take anything they want whenever they want just by showing a chart of their projections for the future. 

It might be true that such projections of SS payouts will grow by x,y,or z amounts, but then so will the paychecks of those paying in.  After all people do not have far larger requirements for cash just because they got old.  If anything they can get adequately by on less.  And it is not as if the majority of citizens will be on social security. 

This smelly accounting and fishy projections on the part of the mostly GOP is a scare tactic to attempt to end all social spending, they want the wealthy to keep it all and everyone else to pay in from their minimum wages to the breaking point and that simply does not allow for any social spending at all.  What a piece of shit the GOP is, and the other guys will not do the right thing either, at least not till it becomes a life and death situation.  How anybody with a net worth under 2 million could possibly vote so badly against their own interests is just beyond me, they must be absolutely convinced their sky god of war is about to hand them six winning lotto numbers.

Sat, 08/06/2011 - 22:32 | 1532162 Anonymouse
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Nonsense.  Other than tinkering, no changes of any significance will be made to Social Security or Medicare.  Perhaps a bit of Medicaid, but that's all.  Senior citizens are too powerful a voting block.  Plus, they, unlike younger people have no chance to adjust their lifestyle and earninga to plan for a reduction in benefits.  That's why the system will not change.

I understand benefits could be reduced or even the program canceled.  But they will not, even though there is no legal obligation to pay any benefits.  The courts determined that long ago.

However, regardless of accounting used, it is the closest thing to an actual liability without actually incurring debt (and I am ignoring for the moment the actual debt owed to the so-called lock box).

In fact, I think the US will default on bonds before defaulting on Social Security or Medicare payments.

Adding to that the fact that demographics will increase the liability ever-higher, it does not matter if you use cash accounting and so ignore this obligation.  It is real.  Hiding your head in the sand with cash accounting will not make it go away

Sat, 08/06/2011 - 18:18 | 1531785 Marina Sorciere
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Don't count on a split rating here. I think we're looking at a downgrade all around.


"Political risk" carries a huge weighting in portfolio allocations in emerging markets and seems like the world is waking up to the fact that categorizing sovereign debt between long-established or emerging market economies should not automatically assign them a rating rank.


Yes, there's the fact that the whole of the US and its currency is TBTF, not just its banks, but isn't that what the crazies of Washington DC were playing on? They just rubbed all international noses into their ugly political and fiscal situation, so why should anyone be surprised at downgrades.


The CRA's deserve to lose all credibility and be prosecuted for fraud over US subprime and let's face it, they are corporate debt rating agencies and never should venture out of that arena, but...


Whether this S&P call was political or not, you can't really argue against it given the underlying numbers. In my view it is not at all subjective and is many years overdue.


Trustee criteria have already been adjusted, so no need to sell just yet, but if and as any alternatives look like a better spot to park cash, they will be chosen and Treasuries will be jettisoned. The negative interest rates the Fed and banks will be charging on large deposits will stimulate the buying to offset the weak knees.


Yes, my guess is that Geithner will take the fall. No regrets there except - what the hell is he doing in any place of responsibility? None of any of these things look like surprises. Corzine next? (gag, retch) Obama will continue his parade of mutants and morons.


End of empire is not pretty.



Sat, 08/06/2011 - 19:45 | 1531950 MsCreant
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End of empire is not pretty.

Beauty is in the eye of the beholder. The end of empire may be exquisitely open and free. We may all be poor but be forced to remember what is important (and it isn't our net worth). AND I could be wrong...

Sat, 08/06/2011 - 22:32 | 1532147 wang (not verified)
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Sat, 08/06/2011 - 17:51 | 1531727 DosZap
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If we get a GOP Potus, and Congress, Obamacare will be KILLED.

If the GOP goes nutso on the SS/MC/MA, then they will be killed Politically.

And we're fooked either way.

This country cannot take another 4yrs of Obamanomics, or a Dem majority in either the Senate ot House.

Sat, 08/06/2011 - 18:37 | 1531822 moneymutt
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Did you read this post? What about the FED? Other than Ron Paul,I hear no Repubs addressing them. Don't think for a second Repubs back in power like 2000 to 2006while close deficit. Look at what the all Repub states have done this year, they cut pensions, laynoff govt employees, butnthen also cut corporate taxes, leaving budgets in essentially same place as before...reg middle class get less, wel off get more, and the state Econ,ies lose jobs, as the businesses, in a recession, have no interest in spending theirncahs nor hiring people did. The newly Repubmlegislators and AGs in states did go after bank fraud, have not created jobs, rather,the passed laws written by the likes of Kochnbrothers et al. Nothing wrong with businesses having a say, and having representatives in oir govt, but when they set hole agenda, not good for common wealth any more than say, it would be if unions set the whole agenda. meanwhile, as we bounce back and forth between complete Repub control and complete Dem control,m the bankers take all our money

Sat, 08/06/2011 - 17:25 | 1531673 malek
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It looks as if the US is going to have a split rating.

Bruce, as you likely are well aware but fail to mention here, the rule in Investment Fund Datamarts is usually "take the worst rating (from the 3 big rating agencies) as the general asset rating.
In other words in a split rating case the worst rating rules.

Sat, 08/06/2011 - 17:00 | 1531629 geno-econ
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Greatest impact is forcing reality check;

Deficits increace GDP ,liquidity but not wealth ,jobs or improve balance of payments

Free  Trade agreements initially improve exports of machinery and industrial products but soon afterwards results in more imports by utilizing industrial machinery and cheap labor to produce consumer and agricultural products for export

Multimationals are just that----not American firms

Ultimatly wars drain economies and empires

Global financial system and Washington unable to solve problem--currency wars simply replace trade wars

Result and remedy is collapse of global monetary system through contagion underway in Euro zone spreading worldwide

Safe havens will be self sufficiency, self reliance and investments in the necessities for life. 

New currency will need value support to instill discipline---gold silver or one world currency backed by an international body yet to be created from the ashes 

Sat, 08/06/2011 - 16:57 | 1531620 Careless Whisper
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Bruce, I think you are missing he big picture. If this is a one time event, fine, whatever. But what happens when there are two, three, or four downgrades? Is the fiscal situation on the right track or wrong track?  Exactly. So after a few more downgrades, who knows the timetable, the U.S. dollar will no longer be the reserve currency. That's where we're heading and the IMF has been pushing for their Central Banker's currency, the Bancor, to take over.

I don't believe that S&P did the downgrade because all of a sudden they got religion. No way. You know where I'm going with this, but I think you can agree that S&P isn't all of a sudden a legit bond rating agency, are they?


Sat, 08/06/2011 - 16:51 | 1531606 monopoly
monopoly's picture

Agree, the drunken party is over. Here is one simple step. Does not solve anything now but for down the road, it might help.

SS will begin at age 68 if you are under 50. That gives plenty of time to adjust, of course assuming you have a job and some assets. No early out. 68. period.

Now this will never happen, means nothing for the deficit but sends the right message.
We the members of Congress of this downgraded land will take a 10% pay decrease, effective immediately and a 25% reduction in expense accounts and benefits and we will pay our own medical premiums.


What have I been smokin :)

Sat, 08/06/2011 - 20:12 | 1531986 Widowmaker
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Whatever it is you are smoking, chances are you will be dead at 67.

You and everyone else are paying for fraud and the ripping off of every working adult who lose a third of their income to something they will never see.

Wake up.

Sat, 08/06/2011 - 19:12 | 1531898 hbjork1
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IMo, I could have contimued working comfortably at good tempo through age 66 and probably crused to age 67.  Beyond that, a lot of people are going to have trouble if the new workplace is as competitive as I think it is going to be.

Sat, 08/06/2011 - 21:50 | 1532123 sellstop
sellstop's picture

Tell you what. Give this nation a single payer system for medical care and all of us 50 and 60 somethings will give you our jobs. There would be a shortage of workers, the wages would rise, we would take less from SS by retiring early, younger workers might, just might be more productive, and when we die, we'll give our wealth you! It won't be eaten up by the last six months of lifes medical bills!!



Sat, 08/06/2011 - 20:40 | 1532032 CompassionateFascist
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The "workplace"? Since when is a Free Fire Zone a "workplace"? Am still amazed that so few people - even at ZH - have any idea what's coming down.

Sat, 08/06/2011 - 16:30 | 1531545 Stuck on Zero
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Dateline September 2013:  In reply to the question: Is there a risk that the U.S. will lose it's BB credit rating Federal Reserve Chairman Geithner stated: "No Risk!"

Sat, 08/06/2011 - 16:35 | 1531561 Kayman
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Dateline September 2013:  In reply to the question: Is there a risk that the U.S. will lose it's BB credit rating Federal Reserve Chairman PeeWee Herman stated: "No Risk!"

Sorry, we need to move up from a single digit to a double digit IQ.


Sat, 08/06/2011 - 16:29 | 1531543 ThirdCoastSurfer
ThirdCoastSurfer's picture

Is McGraw-Hill now a good stock short?

As the owners of S&P isn't their main business selling textbooks and other educational material to public schools funded by federal grants? While S&P may have been compelled to move, their parents at MHP could have interceded, but chose not to, and there must be a price to pay for such an "unpatriotic" (anything negative) downgrade. They'll wish they weren't the bearer of bad news sooner than Wendy will bear Rupert's progeny. 

Sat, 08/06/2011 - 15:35 | 1531430 FinalCollapse
FinalCollapse's picture

It is time for the Congress morons, to immediately cut their fucking and undeserved vacations, return to DC, and figure out how to cut $10T, in the next five years - front loaded. Everything is on the table: taxes, military, entitlements, etc. - you idiots.



Sat, 08/06/2011 - 15:35 | 1531427 Irwin Fletcher
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Thanks Bruce. I disagree on the timing issue. Timing has been an excuse for too much debt. It's not time to stop QE. It's not time to balance the budget. Let's do it later. But their mission is not to condition their advice on the variability of the market. To do so would be fraud. S&P said they would downgrade, their conditions weren't unreasonable, and they were ignored. Sometimes you have to stand up to the bully, and the bully learns that actions have consequences.

Sat, 08/06/2011 - 15:59 | 1531464 falun bong
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yah I think the timing was perfect, too. S&Ps main complaint has to do with US politics. The debt ceiling farce was the ultimate show of political dysfunction and timing the downgrade now is the best way to show their displeasure.

Don't get me wrong I'm not a fan of S&P but they made their point at exactly the right time IMO

Sat, 08/06/2011 - 21:45 | 1532118 toady
toady's picture

Agree that the timing was right, but I wish they would have stuck to the numbers. Making it 'political' only gives the idiots more reason to fight, and wiggle room to try to weasle back to AAA.

If they had stuck with 'we told you 4T short to mid term and you gave us 2T long term back loaded' and made the politics secondary they would have been better off.

Sat, 08/06/2011 - 15:12 | 1531395 MsCreant
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Sorry if that has already been posted. Mish says you are wrong and has a blog post on it.


Sat, 08/06/2011 - 18:38 | 1531829 Bruce Krasting
Bruce Krasting's picture

Saw it and made a response. Mish thinks things get immediatly  transmitted through markets and exports/imports, fx rates, interest rates etc.

He has a detailed economic formula to prove the point.

I say it doesn't work according to his model. There are too many sticky issues for the adjustments to be smooth.

Sun, 08/07/2011 - 02:00 | 1532286 boiltherich
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I can't believe I am going to defend him, but Mish has a great style and some keen instincts.  I do not fault his reporting, only some of his attitudes put me off.  I still check his site every day because he will often come up with very interesting angles nobody else thought of.  I can't see myself ever playing pinochle with the guy, and he might often be wrong or bark up a tree nobody else sees as a problem, but he is also smart and it is a mistake to ignore his work. 

Also when you write to him or comment on his work there is a handy spell check function which this site doesn't bother to provide anymore.  :)

Sun, 08/07/2011 - 13:15 | 1533001 MsCreant
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Mish was the reason I made my first Gold purchase. He taught me a whole lot before I started hanging out here. I agree with you on ALL your points. I check in daily too.

Sat, 08/06/2011 - 17:06 | 1531640 wang (not verified)
wang's picture

people still read Mish?

Sat, 08/06/2011 - 15:08 | 1531388 cossack55
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But they didn't have the balls to take on the fed.

I'm sure they were thinking November 63'.  Maybe the chinese have the balls? One can only hope.

Sat, 08/06/2011 - 14:41 | 1531291 Bear
Bear's picture

August 2011 ...

1) Treasury is facing a massive debt rollover requirement

2) China and Russia buyers evaporate

3) Saudis get a big hit from lower oil prices

4) UK has short term problems now

5) Europe has to buy their own sovereigns

We can only count on those running from European banks, the FED and USA Joe Public to buy these bonds ... wow, we got troubles 

Sat, 08/06/2011 - 20:43 | 1532037 CompassionateFascist
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NY banks will (continue to) shift $$ from stocks to TBs. TBs are the Last Port in this storm. They'll last to - maybe - mid-2012.

Sat, 08/06/2011 - 14:09 | 1531155 oldmanagain
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Most of the article was the same crap that got here in the first place.

Blaming the Treasury Dept is nuts.  

Sat, 08/06/2011 - 14:04 | 1531134 Bear
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Once again, thank you Bruce for your very cogent explanation.

Sat, 08/06/2011 - 14:02 | 1531121 Stax Edwards
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So Bruce, if China is not going to buy anymore treasuries are you saying the result here is the reminbi will finally be allowed to float?

Sat, 08/06/2011 - 14:09 | 1531154 Bruce Krasting
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An interesting conclusion. You are spot on that this would put much more upward pressure on the currency. A free float however is not in the cards.

Every currency is managed today. I don't see that changing for some time.

Sat, 08/06/2011 - 21:53 | 1532127 Toma Haja
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This is the gist of the big game being played.  For the longest time, the U.S. played the free trade game while the rest of the world played the classic mercantilist game.  ZIRP and QE are our belated attempts to keep our economy from being totally shredded.  I agree a rembini free float is not in the cards. China is having a hard enough time keeping the house of cards standing after taking the legs out from under all its trading partners.  They do not have to buy US Treasuries as long as there are other hard assets to buy and markets to corner. 

The question is: since every currency is managed today, and given that it will be some time before that changes, what will be the catalyst?


Sat, 08/06/2011 - 16:41 | 1531576 Stax Edwards
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I think they will keep buying treasuries. They can't have it both ways as you are suggesting.

Sat, 08/06/2011 - 16:33 | 1531558 malikai
malikai's picture

I'm probably wrong for now at least, but ultimately I see the yuan either floating or commodity backed. After this whole mess is all said and done, we have to end up there. We would be foolish to think the Chinese don't want to enjoy the advantages of reserve currency status.

They're just waiting for the right time.

Sat, 08/06/2011 - 15:53 | 1531453 JOHNICON
JOHNICON's picture

I might be wrong with this, but, as long our trade deficit with China exists, won't China have to continue buying USTs in order to keep the renminbi down?  I think China continues to buy until trade flows between China and the US reverse.  I think that would only happen with a depression and wage deflation in the USA.

-Edited:  Added the word "long" to the first sentence.

Sat, 08/06/2011 - 13:20 | 1530901 Everybodys All ...
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Someone seriously needs to punch Paul Krugman right in the mouth the next time he says we did not spend enough.

Sat, 08/06/2011 - 13:16 | 1530882 John Rotten
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My read of this is that they are blaming the politicians. As well they should. I hope that this is the message that comes to the public. It’s the idiots in D.C. that did this to us. They could not come to a compromise when the Nation required that they do so. The “Deciders” let us down. The economy will pay a price for what has happened. I truly hope that some of those Deciders pay a big price too. I think they will.


I disagree that bickering over compromise was required.  I've grown plenty tired of the compromise, reaching across the aisle bullshit charade, acting like they are doing what is in the best interest of the country.  Nonsense.  Sure, I agree that the pols should be blamed for this action, but not as a result of not compromising.  It is because they could not curb their reckless spending.

Also, I resent the entitlement tag on Social Security and Medicare.  I paid into them, therefore I possess the ability to reap something from them.  Want to talk entitlements?  Let's talk welfare, food stamps, Medicaid, and other "social" programs.

Sat, 08/06/2011 - 16:10 | 1531491 bigkahuna
bigkahuna's picture

Agreed. The only solution that may have at least forstalled the downgrade was the Tea Party solution including a balanced budget amendment. Now these guys are going to try to hang the Tea Party out to dry. They were the only ones who could have helped!

Sat, 08/06/2011 - 16:00 | 1531466 citizen2084
citizen2084's picture

You nailed it. Compromise is what has brought us here. Left gets social spending while the Right gets its military spending and the American dollar gets crushed screwing the low and middle class. Both are entitlement programs.

It is amazing that the only comment on the down grade that mentioned the freakin wars was the Chinese statement, and it was half of one sentence.

It is the WARs that are bankrupting this country. Freeze domestic spending on SS & the Medical programs. Shut the empire down and we will make significant progress on our debt.

It is the WARs, and the domestic entitlement program called "national security".  The GWOT is sick proxy for the Cold War entitlement programs.

SS and Medicaid/Medicare are completely broken. We need to let anyone under 50 out of both. The folks younger than 50 that are kicked out SS could even be given US bonds to return what was paid into the program. Not that I want US paper however it would be something, and politically tolerable.

I would get nothing for Medicaid and Medicare.  However new doctors would not have to accept these programs and could start providing cash services, no HMO, no Insurance company, in between the consumer and the provider.

When discussing medical costs, no one ever asks how come Lasik and plastic lips and boobs have gotten so much cheaper?

Leave the over 50 folks alone but let them know - the benefits are not going up. They are frozen. No COLA, no nodda.  I can take care of my parents if needed. That is what family is for. If I have to be burdened horribly so that my children will be free from this mess so be it.

These provides short term progress so can begin to then shrink goverment.

Hello people!!! There is no free ride from any government. ALL THE WELFARE/WARFARE states are FAILING, ALL!


Sat, 08/06/2011 - 13:04 | 1530831 malikai
malikai's picture

Very good arguments Bruce. I take it that you are of the opinion that further QE is dead in the water. Can you elaborate a bit on what you think the FED's reaction to any large scale selling in treasuries would be? I can't see them just sitting on their hands while rates explode, no matter how much the public whines about QE/ZIRP.

Sat, 08/06/2011 - 13:51 | 1531051 Bruce Krasting
Bruce Krasting's picture

If there were to be large scale selling and the result was "Disorderly Markets" the Fed has the authority and will intervene directly in the bond market. They would buy up as many bonds as it took to stabilize things (a trillion or two)

There are two things the Fed does. SOMA and POMO.

POMO is permanent (QE) SOMA is system and is always "temporary". If they had to intervene it would be with the SOMA account. So this is not really QE.

But it is very likely that "temporary" would become Permanent.

Back door QE???

Sat, 08/06/2011 - 14:26 | 1531214 tictawk
tictawk's picture

I think this downgrade has the potential cause Stocks, Bonds and Dollar to be sharply lower on Monday.  If that is the case, how can printing more dollars be a solution?  The Fed will do nothing or have to choose.  Their primary mandate will be to save the dollar and our borrowing ability (debt).  At some point they may in fact have to RAISE short term interest rates sharply to attract money to our shores to fund the debt rollover.  Remember over the last year and a half, Stocks and Bonds rallied because the Fed pushed funny money into the system via their primary dealers who leveraged it into the markets.  That phony stimulus will come out of the markets and Monday could be the start of that move.

What's worse, volume dried up on the entire rally over the last year and shorts were blown out.  So now on the way down, liquidity will be nonexistent.  50% haircut, naw, that couldn't happen!!

Sat, 08/06/2011 - 13:58 | 1531094 malikai
malikai's picture

But they would have to do it quietly wouldn't they? I mean, if word got out that they were going to do another asset purchase program (using SOMA and its "emergency liquidity") to offset a sharp rise in rates, that might just be like throwing more gas on the fire. Sounds pretty damn dangerous to me.

Sat, 08/06/2011 - 14:25 | 1531234 Bear
Bear's picture

I think the FED got caught flat footed here. Remember all those bond puts sold to keep the long end afloat ... they are going to lose a ton of money

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