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

Tyler Durden's picture

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.


There will be endless debate on whether S&P, the rating agency, was justified in stripping America of its AAA rating and — adding insult to injury — even attaching a negative outlook to the new AA+ rating. But this historic action has now taken place, and the global system must adjust. There are consequences, uncertainties, and a silver lining.

Not so long ago, it was deemed unthinkable that America could lose its AAA. Indeed, “risk free” and “US Treasuries” were interchangeable terms — so much so that the global financial system was constructed, and has operated on the assumption that America’s AAA was a constant at the core, and not a variable.
Global financial markets will reopen on Monday to a changed reality. There are immediate operational consequences, from re-coding risk and trading systems to evaluating collateral and liquidity management. Key market segments will be closely watched, including the money market complex and the reaction of America’s largest foreign creditors.
Meanwhile, for the real economy, credit costs for virtually all American borrowers will be higher over time than they would have been otherwise. Animal spirits, already hobbled by the debt ceiling debacle, will again be dampened, constituting yet another headwind to the generation of investment and employment.
It is hard to imagine that, having downgraded the US, S&P will not follow suit on at least one of the other members of the dwindling club of sovereign AAAs. If this were to materialise and involve a country like France, for example, it could complicate the already fragile efforts by Europe to rescue countries in its periphery.
The future role of rating agencies will also now come under close scrutiny, bringing to the fore the question of who rates the rating agencies? S&P’s action will likely unite governments in America and Europe in an effort to erode their monopoly power and operational influence. This will also force all investors to do something that they should have been doing for years: conduct their own ratings due diligence, rather than rely on outsiders.
More worryingly, there will now be genuine uncertainties as to wider systemic impact of this change. With America occupying the core of the world’s financial system, Friday’s downgrade will erode over time the standing of the global public goods it supplies - from the dollar as the world’s reserve currency to its financial markets as the best place for other countries to outsource their hard-earned savings. This will weaken the effectiveness of the US as the global anchor, accelerating the unsteady migration to a multi polar system while increasing the risk of economic fragmentation.
These factors will play out over time, and will possibly do so in a non-linear fashion. Some of the immediate impact will be forestalled by the fact that no other country is able and willing to replace the US at the core of the global system. Other than a general increase in risk premia and volatility, it is therefore hard to predict with a high degree of conviction how the global system will react. Specifically, will it simply come to a new normality, with an AA+ at its core, or are further structural changes now inevitable?
All of that said, there a sliver of a silver lining — and an important one. America’s downgrade may serve as a wakeup call for its policymakers. It is an unambiguous and loud signal of the country’s eroding economic strength and global standing. It renders urgent the need to regain the initiative through better economic policymaking and more coherent governance.
There is a risk, of course, that different political factions will use S&P’s action as a vindication of their prior beliefs. Democrats would argue that it is recent Republican political sabotage that pushed S&P over the edge while Republicans would argue that we are here due to irresponsible government spending by the Democrats.
For the sake of their country and the wider global economy, both parties should resist the urge to begin bickering. Instead they should seize this potential “Sputnik Moment” — a visible shock to the national psyche that can unify Americans around a common vision and a renewed sense of purpose — that of halting gradual secular decline by putting the country back on the path of high growth, job creation and financial soundness.

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automato's picture

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!

malikai's picture

Sadly, yes.

I think we see one of two things. Either S&P found jesus and now has a conscience to deal with, or we're looking at a far more twisted manipulation of public opinion than the surface describes. For instance, it is obvious that SS/Medicare/Military will never be cut "willingly" by the political class for they are all compromised. However, if rates jump, and the economic sitation takes a serious downturn, we may get the sort of market forced austerity Schiff has been talking about all along. After all, if you're a politician, you don't want to go down as the guy who voted to "let the terrorists loose" or the guy who voted to "let granny starve". We know that's how that stuff would be spun, so it is what it is.

So, what if the market forces austerity? Then the politicians can spin it as they were forced to do it. Nevermind it was their own action/inaction which got us here in the first place. Now they MUST cut, and cut big, because if they don't it's game over. Welcome to interest rate austerity.

I'm not sure if that's how it will play out. This is just a thought experiment, really.

grekko's picture

Hallelujah!  It has finally come, no more waiting!  Silver & gold anyone?

IQ 145's picture

Frankly, I think it "heralds" the same fucked up financial era that was going on last month, or six months ago; but what do I know. 

Captain Benny's picture

Nothing of substance to be found from PIMCO.  Makes you wonder what they're thinking over there.


Another of Jim Sinclair's Golden Pillars is met ... Jim was laughed at for calling $1650 at the time... Is this the STHF moment when America gets a kick in the pants?  http://www.youtube.com/watch?v=2N8gJSMoOJc  (I hate NIA's stock picks, but the video is spot on)


Cursive's picture

@Captain Benny

Nothing of substance, indeed.  How about this pablum:

putting the country back on the path of high growth, job creation and financial soundness.

Keynesians think we need government debt to do this, Austrians know that public debt is a drain on growth.  Until the Keynesians capitulate, there is no hope for a bright outcome.  Good job PIMPCO, for overlooking the obvious.

IQ 145's picture

worse than pablum; baby diarrhea for comic book reading morons.

Silverite's picture

Hey, my comic books have done better than the stock market, and some even better than PMs!  Make fun of Television Watching Morons instead, comix are kewl!

PY-129-20's picture


Saudi stock market first to plunge on S&P downgrade          Saudi Arabia's stock market dropped 5.46pc on Saturday as it became the first exchange to react to the historic US credit downgrade.


oogs66's picture

saudi market was closed on thursday and friday.  I suspect at least part of this is catching up to the massive beating stocks took those days.  the $5 drop in oil since the last time they were open might also have an impact

Kat's picture

As the poster above noted, the Saudi market was closed on Thursday (when the S&P dropped 5%) and Friday.  98% of the Saudi economy is petroleum - and that has tanked.  The fall in the Saudi market reflected what happened in world markets.

It doesn't look like there was any reaction in the Saudi market to the downgrade per se.

Another point:  The news was leaked to the market throughout the day.  The S&P basically made it clear that the downgrade was coming.  Everyone on the street knew it was coming that evening.

Personally, I think that if the market reacted badly to the leak, the S&P would have held off on the downgrade or nixed it altogether.  But, the market closed unchanged and the Treasury sell-off was tiny - particularly considering the huge run-up in Treasurys all week.

slaughterer's picture

Futures and AH trading was not significantly affected in US markets when the downgrade was issued.  I observed nothing more than a .5% move.

ZeroPower's picture

Are you trolling? The only important index that matters (Europe was closed) was the S&P contract and it was long closed by 430EST on friday much before the official news hit. So no impact could be seen, but i assure you there will definitely be on.

Kat's picture

TLT, long bond ETF, continued to trade until 8 pm on Friday.  It was up 15bps.

While the SPUs were closed SPY traded until 8pm Friday and it was down 50 bps.  Of course, the stock market was up 2% and down 3% within minutes on Friday.  It's jittery. 

The problem is that there are no good alternatives to Treasurys.  There are other AAA rated sovereign bonds, but no market is as liquid and large as Treasurys.  The U.S. Treasury rates are set by the market, not the ratings agencies.  We are the cleanest dirty shirt.

Kat's picture

TLT, long bond ETF, continued to trade until 8 pm on Friday.  It was up 15bps.

While the SPUs were closed SPY traded until 8pm Friday and it was down 50 bps.  Of course, the stock market was up 2% and down 3% within minutes on Friday.  It's jittery. 

The problem is that there are no good alternatives to Treasurys.  There are other AAA rated sovereign bonds, but no market is as liquid and large as Treasurys.  The U.S. Treasury rates are set by the market, not the ratings agencies.  We are the cleanest dirty shirt.

ZeroPower's picture

Regarding the downgrade news, it was first heard around midday (London time) but none of the traders here believed it. I.e. 'noone has the balls enough to downgrade the Motherland'. Unless people had specific insider knowledge, i doubt many trading desks acted on this stuff, certainly not any PMs who never trade off rumors unlike prop and desks taking flow orders. To that latter end, we saw lot of stuff coming through on the credit side, but the MMs had widened their b/o enough to cushion any sort of illiquidity that could have occured otherwise on the very volatile day.

Next step is to see how futures react tomorrow night along with Asia.

Kali's picture

"none of the traders here believed it".   I believe that.  Reminds me of a large corporate customer I told would have to pay cash cuz they never paid their invoices in a timely manner, had to pull teeth to get paid.  The fuckhead ivy league VP said to me " no one has EVER cut us off!  How can you do that?  We will not honor your invoices anymore!"  Fuckhead didn't get I wouldn't be invoicing them anymore. Entitled fucks, of all persuasions, have a CD moment when their entitlements are denied.

Kat's picture

Yes, but S&P has been telegraphing it for weeks and (hopefully) your traders also use their own internal credit research instead of relying on the political oligopoly of the "our probability of the entire U.S. housing market declining at the same time is zero because it's never happened before even though the national market never went up before either" ratings agencies.

It's not as if the objections the S&P lists are news to the market.  The S&P provided no insights to the market.  Yet, the Treasury yield is down 25 bps over the past week.  Europe is falling apart, which means that the U.S. is the tallest pygmy and there will probably be a flight to Treasurys again next week.

The stock market is another story.  But, an outflow from Europe could also boost the U.S. equity markets - even if that effect isn't immediate.  Maybe.  I covered my deltas and I'm long volatility.  That's pretty much my only opinion about the equity market.

youngandhealthy's picture

@ZeroPower....do your homework. Credit Swiss paper were "heavy" sellers at the ES pit form around 9:50 EDT. That instantiated the first wave of selling Friday. Sure they know.....

IQ 145's picture

Very rare opportunity; when the news actually corresponds to something you can do and use; and the contract is already at too high a price and overbought. Bingo.

IQ 145's picture

Short the long bond contract on the CME at the opening. it's already grossly overbought and into tough overhead resistance; this market is just saying; "Want some free money, short me."

IQ 145's picture

It's a gift from God,(whatever); just short the fucking contract on the opening. It's free money.

Milton Waddams's picture

Since 'analysts' don't think it is happening, it is virtually guaranteed to happen.  Maybe a few punches get thrown before it happens, but it'll happen nevertheless.  It's been in the cards for more than half a decade.    


Xinhua called for the printing of US dollars to be supervised internationally and repeated China's contention that a new global reserve currency might be needed.

Analysts say neither suggestion is likely to happen.


Chuck Bone's picture

You can dress it up any way you want. In the end, it's simple logic. When you borrow, as we have done over the past 30 years in order too boost GDP (and gotten less GDP for each $ borrowed each successive year), you get more in the present and less in the future. We are now in the future. It's simple exponential math. If debt grows faster than GDP, which it has for decades, then there is no way to "grow our way out of it."

At some point one is forced to stop the borrowing and pay down the debt. Of course no one tells the truth about what this actually means: an at least 10% hit to GDP as the so-called stimulus masquerading as growth disappears. Watching BBG TV last night, every single asshole they brought up was singing the "more short-term stimulus is needed" tune. Well, that's what you said in 2008! That's what you said in 2000! You can't paper over the simple fact that we are NOW facing the fact that we pulled forward demand for the past 30 years through debt-financed deficit spending, and that we actually have to pay that back now.

When you borrow, you get more in the present for less in the future. Welcome to the future.

Cleanclog's picture

Yep, we have debt saturation, not just in the USA but worldwide. Banking systems, households, governments. There is insufficient economic engine to surmount this mountain (or quicksand bog) of debt. Repudiations, write downs, forgiveness and living smaller is the only exit strategy with a chance.

Kat's picture

You mean the long run is here?  Oooooh.  Don't tell the Keynesians.  They assumed we'd all be dead.

BTW...GDP is a horrible measure of economic prosperity.   It's just spending.  There is so much it doesn't capture, but it's so simplistic that even a few politicians understand it.


Diogenes's picture

They are all dead. Keynes, Roosevelt, Atlee and thousands of others all managed to skate with the swag before the SHTF.

Athemos's picture

Well that's what happens when you get off the gold standard and onto the debt standard.

IQ 145's picture

Yeah; reality is a bitch, isn't it?

Caviar Emptor's picture

The fight is just warming up. Everyone will blame, nobody will want to take a hit

disabledvet's picture

yeah it's a "new age" all right with gold prices still surging, silver soaring and oil still running the so called global economy into the ground. a veritible "victory" for the epononymous "New World Order." we shall see how the Asian "success stories" open Sunday evening. Methinks "rising above it all" is fast becoming more than just some philosophical joke at this point. and again i renew my call for a draft. i think it is safe to title our Zero Hedge saga "FIATSCO!" at this point.

Bam_Man's picture

The real insult here is that France now has a higher credit rating than the U.S.

Sacré bleu!

falak pema's picture

but, but, but they make good chardonnay to take the bitter taste away. Go long champagne!

CapedCrusader's picture

Pimpco has been decimated by its short treasury and long Italy positions.  These are a bunch of shysters.  I wouldn't give them a plug nickel.



gwar5's picture



Hey, if they we spiral currency values down simultaenously, then maybe we can spiral down our credit ratings all together and nobody will notice either.

NWO time, Bitchez! 

That's what they all mean by "new financial era", etc, etc.

Obama has killed America.

Pure Evil's picture



America died a few decades back, think sometime around 1971, they've just been covering up the stench of the decomposing corpse with bling-bling like materialism and conspicuous consumption.

Only now are some willing to come to grips with the fact that the corpse is now nothing more than a gelatinous ooze.

IQ 145's picture

Yep; 1971. the little date that everyone overlooked. When they gave China most favored nation status; I almost shit myself. Of course, it all started when the professional snipers took out JFK.

machineh's picture

Zerohedge featured an excellent article posted on 07/20/2011, about CDS implied spreads. It correctly forecasted a downgrade for the US.


France was lumped in with its AAA peer group, which has now shrunk by one member (the US).

With the French-German yield spread having widened to 84 basis points last week, it would be interesting to know the latest reading on what French CDS spreads imply that its credit rating should be.

If 'FrAAnce' gets consigned to the periphery instead of to the mighty Teutonic core, the euro experiment is OVER.

falak pema's picture

To be or not to be the euro queen, is the question that MERKEL ASKS herself. Its a game changer. For the EU as a whole. If the USD really starts spinning down and there is a consolidated cabal to search for a new reserve, then the Euro will be fortified, by the chinese and russian nest eggs. How the market regulation rules will be changed if the FED and US government get sidelined in the new financial architecture is what the chinese are asking themselves. Merkel/China/Russia (for its RM), plus a weaker USA is what the NWO will be if the US tanks economically. Its all pie in the sky as nobody knows how the US political system + WS Oligarchs will play their cards. In its current gridlocked state in DC it is a bonus for the other side. 

But as the clock turns, it looks like Merkel will find it difficult to swallow the Italian cum Spanish monster debt. Ciao, ciao euro queen if this is true.

machineh's picture

deleted duplicate post

Bam_Man's picture

"Deficits don't matter."

plocequ1's picture

Dr Pretorius: " A new world of gods and monsters"

johngaltfla's picture

So when does PIMCO get downgraded? After all they invest in all the crap in this country which is now up for further downgrades...

oobrien's picture

Fuck PIMPCO in its hedge-fund ass!

Let's start being patriotic Americans again!

Fuck Wall Street!  And fuck the multi-national corporations!

We've done it before. We can do it again..

Let's love our country, and fuck the rest.


IQ 145's picture

wow, you're really out of your mind.

wang's picture
wang (not verified) Aug 6, 2011 12:07 PM

Gross was talking bad about Fraance on Friday



also not normal for Blooomberg to be so unflattering of the Pres this image from their current headline


MobBarley's picture

Germany would withdraw from the ESFS except in the backrooms they're

discussing a new form of European Conquest unt German Superiority

with glee. I foresee a great deal of German tourists in Ireland, Spain, Portugal, Italy, Greece and France soon.


gwar5's picture



Hey, if they we spiral currency values down simultaenously, then maybe we can spiral down our credit ratings all together and nobody will notice either.

NWO time, Bitchez! 

That's what they all mean by "new financial era", etc, etc.

Obama has killed America.

CombustibleAssets's picture

My opinion of the Ratings agencies has gone up another notch.

They're actually starting to grow a pair.