Guest Post: America “Makes The Cut” – So What Happens Next?

Tyler Durden's picture

Submitted by Brandon Smith of Alt-Market

America “Makes The Cut” – So What Happens Next?

Around the world, starting Monday, all eyes are on the markets. The tension is palpable. The uncertainty is ample. And anger is heavy in the air. As predicted, the debt ceiling deal was not only NOT enough to assuage economic fears, it actually exacerbated them, triggering a flight from the Dow, and creating a decisive opportunity for ratings agency S&P to cut the once perfect U.S. credit rating from AAA to AA+.

At Alt-Market, we often talk about points of balance, and how certain moments in history become highly visible indicators of balance lost. If we pay close attention, and know what we are looking for, these moments can be recognized, allowing us time to shield ourselves from the explosion and the resulting financial shrapnel. The past two weeks have culminated into one of these defining events that tell us the tide has fully turned, and something new and dangerous is just over the horizon. The question now is; what should we expect?

The nature of the credit downgrade situation is not necessarily “unprecedented” in history, but it is surely unprecedented on the scale we see currently in the U.S. It is difficult to predict how exactly the investment world will react. Some consequences, though, are probable, if not inevitable. Let’s examine the events we are likely to see in the coming weeks as well as the coming months, as nations attempt to adjust to America’s final plunge…

1) Ratings Agencies Under Attack

This has already begun. Italian authorities have raided the offices of S&P and Moody’s, apparently perturbed that their credit rating is not under their control. The U.S. is accusing S&P of making "accounting mistakes” and jumping the gun on the American downgrade. The battle between insolvent governments and the ratings agencies from here on will escalate quickly. More offices will be investigated and raided. The mainstream media will try to assert that the downgrades are “not that important”, and that the U.S. will recover quite nicely without a perfect score. Eventually, as the collapse becomes more evident, ratings agencies will fill the role as the go to scapegoat / economic hitman at which all governments will point accusing fingers.

“S&P is gonna’ cut you man! S&P’s a blade-man, man!”

In my view, it’s all theater. First, let’s set aside the recent ratings cuts altogether and look at the facts. The U.S. should have been downgraded years ago, especially after the Federal Reserve decided to begin purchasing U.S. Treasury Bonds in place of dwindling foreign interest and turned to monetizing our debt to the point of rampant inflation. Italy and numerous other EU members should have been downgraded to junk status a long time ago as well. If anything, the ratings agencies over the past few years have been PROTECTING the credit reputations of many countries which in no way deserve it. The recent downgrades are long overdue…

Second, suddenly governments and MSM pundits feel it necessary to point out the large part ratings agencies played in the derivatives bubble and subsequent credit crisis? Please! They were perfectly content with S&P or Moody’s giving fraudulent top ratings for toxic garbage securities, and even defended agency actions after the bubble burst! Now, after they finally start doing their jobs by downgrading bad debt, governments want an investigation?

Third, ratings agencies were not alone in the creation of the derivatives bubble. The private Federal Reserve artificially lowered interest rates and flooded the markets with cheap fiat. International banks used this fast money to create the easy mortgage groundswell and the derivatives poison that was fed it into the system. Ratings agencies went along with the scam and graded the worthless securities as AAA. The federal government and the SEC allowed all of this to take place by purposely ignoring the crime and refusing to apply existing regulations in investigating the fraud.

The Bottom line? You CANNOT create an economic crisis like the one we face today without collusion between big business, government, regulatory bodies, and ratings agencies. The Obama Administration is well aware of this, and the attacks on S&P are nothing more than a show. S&P is not to blame for the downgrade this past weekend. They are ALL to blame.

2) Increased Borrowing Costs

While the mainstream will attempt to downplay the effects of a U.S. downgrade, they cannot deny that our country’s borrowing costs have just gone up. This causes several unfortunate circumstances to develop. Our ability to continue funding our liabilities is now greatly diminished, unless we turn to the Federal Reserve even more in the purchasing of treasury bonds. If investors and central banks can’t get AAA protection for their money in America, they will simply turn to other countries that still retain a top credit rating. The safety of dollars and treasuries already held by other countries will come under question. In response to the S&P downgrade, China, our largest creditor, has openly stated that U.S. securities can no longer be trusted, and that the dollar must be replaced as the world reserve currency. If the dollar does not take an immediate dive starting this week, it certainly will over the course of the Fall season. There are, indeed, many direct consequences in light of a U.S. downgrade. Anyone who says otherwise is living in dreamland.

3) European Union Feeling The Pain

The EU is on a direct interception course with disaster, just as we are, however, being that the U.S. dollar is a widespread world reserve currency, all nations will be affected by our particular downgrade, as opposed to the Greek downgrade, for example, whose effects were minor in comparison.

The European Central Bank has initiated its own TARP measures, and due to the quickening implosion of Spain and Italy, is fully prepared to print fiat Euros in a desperate attempt to control the damage. European reliance on the American consumer has proved fatal. The result is an ever expanding avalanche of fiat on both sides of the Atlantic in an insane race to the bottom between our respective currencies. This development fits perfectly with the IMF plan to introduce Special Drawing Rights (the SDR) as the new global reserve currency, though I’m sure it’s all just a coincidence…

The ECB is also facing serious resistance from Germany, which has been shelling out the largest portion of bailout funds for countries like Greece, Ireland, and Portugal. Germany is tired of playing sugar daddy to the EU, which could conceivably lead to a breakup of the union itself, even with the implementation of fiat injections.

4) Blame Game Overdrive

The blame game is about to get ugly. When economic catastrophe is on the line, civility goes out the window. Who will be the primary target besides ratings agencies? Why fiscal conservatives, of course! Obviously, the Tea Party is full of “terrorists”, and real conservatives are the true culprit behind the collapse because we have this annoying tendency of pointing out that our spending addicted government is dragging us hogtied on a speedboat to Hades.

Please, America, don’t blame the Federal Reserve for feeding the derivatives bubble and destroying our currency. Don’t fret over global banks like Goldman Sachs that deliberately conjured the credit crisis. Don’t attack the government for lending a helping hand to these entities in their quest for complete financial centralization. Instead, shoot the messenger. We love that…

5) Drastic Measures

An announcement by the Fed of yet a third QE stimulus package is a certainty. If the market reaction is especially negative this week, an announcement could even be made before this month is out. I have no doubt, QE3 will be the undoing of this country. Any further devaluation of the dollar will NOT be tolerated by creditor nations who have much to lose if the process of U.S. inflation continues. Treasuries will be dumped. The dollar will be dumped. And, America will have little choice but to hyperinflate to keep up with rising debt burdens.

Those who believe that the U.S. is not expendable in terms of the world economy, and believe that foreign nations will continue pouring money into our coffers because they “have to”, are kidding themselves. We are dealing with an engineered global shift. For central bankers, the U.S. economy is no less expendable than an aging sports car. It can easily be replaced with something newer, shinier, and more compact. Something that will get more girls. The call for “international regulation” of U.S. finances will become the rallying cry of elites across the planet, as well as the largest holders of our exponential debt. The current system will be sacrificed to make way for an IMF controlled body of unaccountable economic overseers.

This is not theory. This is not conjecture. This is reality. The credit downgrade of the U.S. is a concrete trigger point that sets all of the above proceedings in motion.

People will ask for hypotheses on time frames for the events above. I don’t have any, though this week’s market attitudes will be revealing as to the speed that events will take shape. So many interacting factors are present that any specific time predictions on the progress of collapse would be unrealistic. For the short term, watch Federal Reserve activity carefully. Introduction of new QE will be extraordinarily volatile. For the long term, watch wholesale and retail prices of goods, along with treasury auctions and foreign flights from U.S. bonds. One thing is certain, the final half of 2011 will be remembered as a historical turning point for us all.  That said, the trials ahead were never the issue. That which is most important is how we RESPOND in these moments. How we adapt. How we function. How we fight back. Disasters do not make history. We make history. As overwhelming as the currents of such events may feel, in the end, they are subservient to the actions of resolved men. Nothing is fated. The conclusion depends upon us.

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Dave Thomas's picture

Looks like there are some angry Jamacians!

midtowng's picture

My guess is that we won't see a Black Monday, but only because the central banks will openly manipulate the markets.

Of course the problem from open manipulation (as opposed to behind-the-scenes) is that you can only do it once before the markets lose credibility.

Smiddywesson's picture

Sorry, market manipulation has been pretty open these last three years and nobody cares.


TwelfthVulture's picture

Maybe because the only participants in the market are the ones doing the manipulating.

UGrev's picture

we've already passed that point...

EhKnowKneeMass's picture

Wanna bet that it might be a green Monday?

YHC-FTSE's picture

Can't tell until 4pm closing obviously, but S&P afterhours trading is currently 0.8% in the green, Dow 0.26%, and Nadaq -1.04.


It's either going to be a monumental day of red, or it is not. In light of QE expectations, I'd say it could be the latter. But almost everyone I know thinks it's going to be the worst day this year.

EhKnowKneeMass's picture

Thanks for opining, instead of just decrementing the counter. I will not try to offend your intelligence, but, obviously, the market has a propensity for proving most wrong; and it might just do that on Monday. The reason I say that is because of the NFP predictions here. Did you happen to read what most were predicting. It did not turn out to be true. Call it manipulation or the truth, but most were proven wrong and the number just surprised on the upside. And that might just happen on Monday. Every governmental agency, around the world, will downplay this event. The CBs will throw everything at the market to maintain control. Therefore, we might just close green. That's my supposition and I might well be wrong. But that's okay; I have been wrong before. Let's watch and see how the situation unfolds. And as you say, 'can't tell before 4 pm obviously'.

TwelfthVulture's picture

You're absolutely right.  It may well be a green day, however, in my opinion, the fact that the market sentiment has turned decidedly bearish, indices are flirting with major technical support levels coupled with the s&p news and the continuing euro disaster, my bets will prolly be cautiously on the short side.   Plus, my gut tells me it's a major bear market forming.   Like you, I may be right, I may be wrong, I too have been wrong plenty of times in the past. 

WestVillageIdiot's picture

Those are not the futures being looked at.  The futures will not reset until later today, after the Asian opening.  That is when you will get a better idea about tomorrow.

What has been quoted above is from Friday's close.  That is the rearview mirror.  In front of us is the semi coming in the wrong direction. 

TwelfthVulture's picture

Really?  You don't say?  I did not know that futures cutoff on Friday eve at 4:30 p.m. until Sun eve.  He still could be right, it may well be a green day tomorrow. 

I forgot who said it, and I'm probably paraphrasing, "In every market transaction there's a buyer and a seller.  Both believe they are astute."

Kayman's picture

 "In every market transaction there's a buyer and a seller.  Both believe they are astute."

Let's modernize that saying, "In every apparent market transaction, there is a Primary Dealer and the Fed, acting as buyer and seller, to mimic market activity.  Both are shills.

YHC-FTSE's picture

Yep. 2am GMT is when I'm busiest. Whether wishful thinking or not, I'm told it will open green. We'll see. 


EDIT: Ha! Red, red, red. -2% down at least on S&P, DOW, and Nasdaq open

YHC-FTSE's picture

+1 There, you got your first increment. :)

We're heading for a green S&P opening, sure. How the day ends is beyond our control and we can only surmise on the likely actions of those who have the funds to manipulate the desires and nightmares of ordinary people. If it were not for the EU fracas, I would have said QE would come much later and we would see more controlled heavy losses this week. But the US downgrade compounds the EU contagion and that may be just one too many unknown variables to play fast and loose with the markets for those in power.

All of these emergency meetings this weekend can only be about stemming the flow of red. So, your/our supposition may be right. On the other hand..... if they decide to let it ride for a myriad of political reasons, tomorrow could be one of the worst days in history, after which all manner of nightmares can become reality: QE becomes the hero, and austerity measures the manna that nourishes the markets until the public is bled dry. Interesting week ahead.

MicksBus's picture

Lads the craic = 90 (if you own PMs)

Cindy_Dies_In_The_End's picture

Sorry, but QE3 as we know it to be will NOT happen. Its not that Ben doesnt want to: he just can't. If they do anything, it will be to hold the line, while all attempts are made to distract the citizenry with something else: whether we throw the the EU under the bus, up to war (either option hurts us too)


A little dated but read Buiter's Debt of Nations at page 64 about the USA. Watch for an increase in long Treasury rates to help determine how the world has really digested the latest S & P downgrade



Maybe the Old Regime and its Banks WILL HAVE TO EAT THEIR PEAS!! bwahhaha.

Temporalist's picture

Sorry Cindy they can't hold the line as it is already sagging too deep.  They are left with nothing else but their Billy Barule, i.e. printing money.

Oh Billy, Billy, Billy...

Cindy_Dies_In_The_End's picture

Let me tell you something, when EVERYONE screams QE3, it ain't gonna happen. I didn't say that the Fed won't do Something else, just won't be QE3 as we know it, thats all.


Contrarians live longer, honey.

Loose Caboose's picture

Cindy is right.  No QE3 as we know it.  QE3 would guarantee another downgrade - perhaps Moody's this time - and bring an abrupt end to the story. The EU could well be thrown under the bus to funnel the desperate money to the US$ yet again to save it another day.  But this thing is on the ropes and running out of options quickly.  I really do fear that TPTB may unleash holy hell in the form of a global/national disaster to distract and consolidate the masses - sort of like a shot to numb the pain while they remove every vital organ. 


New World Chaos's picture

9/11 10-year anniversary coming up.  There have been increased troop movements around the country and plus we have the Super Congress, which would be perfect during martial law.  False flag coming?

Doyle Hargraves's picture

Those who believe that the U.S. is not expendable in terms of the world economy, and believe that foreign nations will continue pouring money into our coffers because they “have to”, are kidding themselves.-SJGR Bitchez!

Temporalist's picture

Of course that is true.  Would a bar owner continue to extend credit to an alcoholic indefinitely just so they can "sell" them more alcohol?  Some day the check has to be paid.

trav7777's picture

they would if their entire bar was predicated upon being the sales end of a ponzi

snowball777's picture

That would be a function of how many other living drunks were available in the general vicinity.

falga's picture

Let's fire all of congress for not doing the needed cut in the deficit! This crisis of incompetence is their's only....

CapedCrusader's picture

Ridiculous.  I predict bond yields are stable and the equity markets end the week up 4%.  Debt downgrade is meaningless.

I'll be easily stealing money from the sheeple this week.  


Spitzer's picture

It wouldn't surprise me.

The markets are mentally fucking retarded. Gold down $80, DOW down 60, dollar up 4%

narapoiddyslexia's picture

Good farm land, bitchez, with water. And large-caliber rifles. And lots and lots of ammo.

Conor's picture

Lead of the 9mm, .45, .223, and 00 buck variety is the precious metal of the future.

Great to live down South. Plenty of farm land, plenty of water, and warm weather.

Blue-state urbanites will be in big trouble when society falls apart.


toady's picture

I bought out two local Walmarts 30.06, .45, .22, double aught AND slug shotgun ammo.

So my lead is fully funded.

Now if I could only top up silver!

srelf's picture

You know, of course, that the ammo you now collect may be used against one of those now amiably conversing with you!


A Lunatic's picture

Who could possibly have not known this day was coming?  Would it seem out of sorts for a grown man to curl into fetal position behind the toilet, while chain smoking cigarettes and crying for his Mommy, or is it too soon for that?

Boilermaker's picture

In all seriousness, the 'collapse' which is coming, and I do believe it is, will seriously destroy China the most.  In my thoughts, bring it on and get it over with.  the EU and US will rebuild quickly and, this time and hopefully, correctly.  China can go eat a bag of shit as far as I'm concerned.

Of course, there might be some more flaming pelican sightings off the coast of L.A. but this is unavoidable now.

I'd rather take the hit now and live a life of shit than let my kid end up some sort of serf to the Chinese.

meatball's picture

Keep dreaming.

If everyone falls, who has more to lose? People in the west.

Chinese who lose their 50 cents an hour job making iphones will just go back to farming.

Boilermaker's picture

You're just flat wrong and, I suspect, have never actually been to China.  That place will absolutely implode if we just simply stop buying their shit (including iphones, etc).

The EU and US will struggle, for sure.  But, you can't strip us of what we already have.  China will go back to the stone age.

This is overdue.

Smiddywesson's picture

Agreed China would implode if we raised trade barriers.  It is only continued prosperity, or the hope of continued prosperity, thatt has led the public to buy into the Century of China pipe dream.  One billion single guys discovering they will never find a wife leads to all sorts of ethnic, religious, you name it violence.

They didn't toss out Google for nothing.  They are scared to death of the public.

Zero Hedging's picture

If the US (when) does down, it will be a global event.  No one is immune....

Boilermaker's picture

Well, that's going to happen.  Now place your chips on who you think emerges from the dust.  China is a fucking joke compared to the EU and US.

DosZap's picture

Zero Hedging

Agree, the only countries that would not be in serious trouble, are the undeveloped, and underdeveloped.

That's one reason for the Expat Brigades running up prop values in places NO one ere would wanted to have lived 10yrs ago.

Temporalist's picture

Yes DZ the people that will suffer the least are those that are already used to suffering.  There is nowhere to go but up when you are already at bottom.

Boilermaker's picture

That's great logic.  I never thought of it that way.  It's like the people with cancer are the least afraid of chemotherapy.  Or those that are the least educated about how bad their lives have the best percieved quality of life.

That's some deep zen buddah shit there.

toady's picture

The problem is that China, and India, had a taste of ipads, indoor plumbing, and cars for the last decade pr two. Add that to their HUGE populations, and I don't see a good outcome.

Hell, China is having problems controlling their population now, with dissidents and riots already the norm. Now imagine post-collapse.

Sure, some outlying natives may never know the difference, but a billion screaming Chinamen, or Indians, in the cities will be hard to handle.