Showing posts with label S and P. Show all posts
Showing posts with label S and P. Show all posts
Saturday, August 06, 2011
Tuesday, April 26, 2011
S&P Is Too Optimistic
From: Asia Times Online
The good news from Standard & Poor's was that the company reaffirmed the United States' "AAA" sovereign debt rating. The bad news was that its outlook was revised to "negative".
From Standard & Poor's: "We believe there is a material risk that US policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns."
US bond prices actually moved up on the news (in the face of last Monday's weak stock market), and yields ended lower for the week. It's true that the markets were not caught unaware of our nation's fiscal woes. And similar to other potentially negative fundamental developments, markets participants are these days content to play the here and now - and leave structural issues for some later date.
From my perspective, S&P's summary point for why the US retains its top rating provided the most contestable aspect of their report: "The economy of the US is flexible and highly diversified, the country's effective monetary policies have supported output growth while containing inflationary pressures, and a consistent global preference for the US dollar over all other currencies gives the country unique external liquidity."
Clearly, our "flexible and highly diversified" economy was unsuccessful in thwarting a crisis of confidence for much of our private sector debt - a debacle that nearly led to the collapse of our credit system, stock market and economy back in 2008. And having witnessed our monetary policy propagate a 20-year cycle of booms and busts, I'll stick to the view that the Federal Reserve is more of a liability than an asset when it comes to prospective debt quality.
Loose monetary policy from the Fed accommodated the greatest expansion in mortgage debt in history - and now zero rates and monetization are well on their way to supporting a historic boom in government debt. And, of course, a decade of dollar weakness raises the question as to the true underlying "global preference" for our currency.
There's going to be one hell of fight in Washington over the details of deficit reduction. With too many eyes on 2012 elections, it's sure to be a challenging environment - to say the least - to muster bi-partisan compromise. Prospects for any serious near-term spending cuts are slim to none - and the markets are more than fine with this. The marketplace believes it has at least a couple additional years before the debt situation turns problematic (hence, market-impactful). In the meantime, participants are confident that the odds of big - and destabilizing - spending cuts prior to 2013 are slim. This is all in the market.
The good news from Standard & Poor's was that the company reaffirmed the United States' "AAA" sovereign debt rating. The bad news was that its outlook was revised to "negative".
From Standard & Poor's: "We believe there is a material risk that US policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns."
US bond prices actually moved up on the news (in the face of last Monday's weak stock market), and yields ended lower for the week. It's true that the markets were not caught unaware of our nation's fiscal woes. And similar to other potentially negative fundamental developments, markets participants are these days content to play the here and now - and leave structural issues for some later date.
From my perspective, S&P's summary point for why the US retains its top rating provided the most contestable aspect of their report: "The economy of the US is flexible and highly diversified, the country's effective monetary policies have supported output growth while containing inflationary pressures, and a consistent global preference for the US dollar over all other currencies gives the country unique external liquidity."
Clearly, our "flexible and highly diversified" economy was unsuccessful in thwarting a crisis of confidence for much of our private sector debt - a debacle that nearly led to the collapse of our credit system, stock market and economy back in 2008. And having witnessed our monetary policy propagate a 20-year cycle of booms and busts, I'll stick to the view that the Federal Reserve is more of a liability than an asset when it comes to prospective debt quality.
Loose monetary policy from the Fed accommodated the greatest expansion in mortgage debt in history - and now zero rates and monetization are well on their way to supporting a historic boom in government debt. And, of course, a decade of dollar weakness raises the question as to the true underlying "global preference" for our currency.
There's going to be one hell of fight in Washington over the details of deficit reduction. With too many eyes on 2012 elections, it's sure to be a challenging environment - to say the least - to muster bi-partisan compromise. Prospects for any serious near-term spending cuts are slim to none - and the markets are more than fine with this. The marketplace believes it has at least a couple additional years before the debt situation turns problematic (hence, market-impactful). In the meantime, participants are confident that the odds of big - and destabilizing - spending cuts prior to 2013 are slim. This is all in the market.
Inflation? Michael Kinsley Thinks It's Coming
This from the guy who was routinely handed his head on "Crossfire" by Pat Buchanan and John Sununu back when CNN was in its salad days.
From: The Los Angeles Times
Standard & Poor's, the bond rating service, has been widely mocked for its recent prediction that the U.S. government may default on its bonds. It's a highly qualified prediction, sort of a prediction of a prediction of a remote possibility. S&P estimates there's a 1-in-3 chance that it will downgrade its ratings of U.S. bonds. So the chance of a default has increased from unimaginable to almost unimaginable. But, like that kid in math class who bursts into tears when the test comes back graded A-, America would find this traumatizing because it's never happened before.
Some people say, relax and don't worry about it.
They argue first: Standard & Poor's is dealing, in this case, with public information. It knows nothing that you don't know, or could not find out, about United States government bonds. These aren't remarkable investment opportunities involving Nigerian royalty, like the ones offered in my email inbox every day. They are backed by the full faith and credit of the United States.
Besides, the folks at Standard & Poor's are just overcompensating for burying their heads in the sand during the subprime mortgage collapse.
What's more, the United States government will never default on its debts, because (unlike almost every other debtor in the world, including other sovereign nations) the United States can just print more money. "At least one economist" (i.e., one economist) is widely cited in the blogosphere as issuing a "derisive guffaw" at the notion that the United States can ever default on its obligations as long as there's still fuel to run the printing presses.
Well, I don't know. Standard & Poor's may know nothing that I couldn't find out, but it certainly knows more than I've bothered to find out. (And how about you?) And how its experts assess all this publicly available information is surely worth knowing, isn't it?
Second: Yes, the bond rating agencies failed to warn investors about the home mortgage debacle. What are they supposed to do now? Just go out of business?
From: The Los Angeles Times
Standard & Poor's, the bond rating service, has been widely mocked for its recent prediction that the U.S. government may default on its bonds. It's a highly qualified prediction, sort of a prediction of a prediction of a remote possibility. S&P estimates there's a 1-in-3 chance that it will downgrade its ratings of U.S. bonds. So the chance of a default has increased from unimaginable to almost unimaginable. But, like that kid in math class who bursts into tears when the test comes back graded A-, America would find this traumatizing because it's never happened before.
Some people say, relax and don't worry about it.
They argue first: Standard & Poor's is dealing, in this case, with public information. It knows nothing that you don't know, or could not find out, about United States government bonds. These aren't remarkable investment opportunities involving Nigerian royalty, like the ones offered in my email inbox every day. They are backed by the full faith and credit of the United States.
Besides, the folks at Standard & Poor's are just overcompensating for burying their heads in the sand during the subprime mortgage collapse.
What's more, the United States government will never default on its debts, because (unlike almost every other debtor in the world, including other sovereign nations) the United States can just print more money. "At least one economist" (i.e., one economist) is widely cited in the blogosphere as issuing a "derisive guffaw" at the notion that the United States can ever default on its obligations as long as there's still fuel to run the printing presses.
Well, I don't know. Standard & Poor's may know nothing that I couldn't find out, but it certainly knows more than I've bothered to find out. (And how about you?) And how its experts assess all this publicly available information is surely worth knowing, isn't it?
Second: Yes, the bond rating agencies failed to warn investors about the home mortgage debacle. What are they supposed to do now? Just go out of business?
Saturday, April 23, 2011
The Disappearing Dollar
From: National Review Online
President Obama, one of the most insane spenders in Washington, has a twelve-year plan.
After hearing the president’s plan, Standard & Poor’s downgraded the U.S. sovereign-debt outlook to “negative.” Ah, the fine art of understatement. In 1940, after the fall of France and the evacuation from Dunkirk, presumably they downgraded Britain’s outlook to “spot of bother.”
At the world’s first “Presidential Facebook town hall meeting” on Wednesday, even Obama had a hard time taking his “plan” seriously. Sometimes he referred to it as a twelve-year plan, sometimes ten years, sometimes saving four trillion, sometimes saving two trillion. So will the Obama plan save four trillion over twelve years or two trillion over ten?
For the answer let’s go to next week’s first presidential Twitter town hall meeting:
OMG!!! LOL!!!!!!! ROFLMAO!!!!!!!!!
Overly Massive Government!!! Legislating Official Largesse!!!!!!! Requiring Offering Foreign Lenders More American Ownership!!!!!!!!!
The president’s plan is to balance the budget by climbing into his Little Orphan Obammie costume and singing: “The sun’ll come out tomorrow / Bet your bottom dollar that tomorrow there’ll be sun.” We’ve already bet our bottom dollar and it’s looking like total eclipse. But Obammie figures if we can only bet Daddy Warbucks’s bottom dollar, the sun will shine. The “rich” don’t have enough money to plug the gap: As a general principle, whatever the tax rates, the Treasury can never take in more than about 19 percent. Since Obama took office, the government’s spent on average 24.4 percent of GDP. That five-point gap cannot be closed, and it’s the difference between the possibility of a future and the certainty of utter ruin. Hence, outlook “negative.”
By the way, if you were borrowing (as the United States government does) 188 million dollars every hour, would your bank be reassured by a 12-year plan?
That’s 2023. Go back 12 years. That’s 1999. Which, if any, politicians in that year correctly identified the prevailing conditions in the America of 2011? Most of our problems arise from the political class’s blithe assumptions about the future. European welfare systems assumed a mid-20th-century fertility rate to sustain them. They failed to foresee that welfare would become a substitute for family and that Continentals would simply cease breeding. Bismarckian-Rooseveltian pension plans assumed you’d be living off them for the last couple of years of your life. Instead, citizens of developed nations expect to spend the final third of their adult lives enjoying a prolonged taxpayer-funded holiday weekend.
Congressman Paul Ryan, one of the least insane men in Washington, has a ten-year plan.
After hearing the president’s plan, Standard & Poor’s downgraded the U.S. sovereign-debt outlook to “negative.” Ah, the fine art of understatement. In 1940, after the fall of France and the evacuation from Dunkirk, presumably they downgraded Britain’s outlook to “spot of bother.”
At the world’s first “Presidential Facebook town hall meeting” on Wednesday, even Obama had a hard time taking his “plan” seriously. Sometimes he referred to it as a twelve-year plan, sometimes ten years, sometimes saving four trillion, sometimes saving two trillion. So will the Obama plan save four trillion over twelve years or two trillion over ten?
For the answer let’s go to next week’s first presidential Twitter town hall meeting:
OMG!!! LOL!!!!!!! ROFLMAO!!!!!!!!!
Overly Massive Government!!! Legislating Official Largesse!!!!!!! Requiring Offering Foreign Lenders More American Ownership!!!!!!!!!
The president’s plan is to balance the budget by climbing into his Little Orphan Obammie costume and singing: “The sun’ll come out tomorrow / Bet your bottom dollar that tomorrow there’ll be sun.” We’ve already bet our bottom dollar and it’s looking like total eclipse. But Obammie figures if we can only bet Daddy Warbucks’s bottom dollar, the sun will shine. The “rich” don’t have enough money to plug the gap: As a general principle, whatever the tax rates, the Treasury can never take in more than about 19 percent. Since Obama took office, the government’s spent on average 24.4 percent of GDP. That five-point gap cannot be closed, and it’s the difference between the possibility of a future and the certainty of utter ruin. Hence, outlook “negative.”
By the way, if you were borrowing (as the United States government does) 188 million dollars every hour, would your bank be reassured by a 12-year plan?
That’s 2023. Go back 12 years. That’s 1999. Which, if any, politicians in that year correctly identified the prevailing conditions in the America of 2011? Most of our problems arise from the political class’s blithe assumptions about the future. European welfare systems assumed a mid-20th-century fertility rate to sustain them. They failed to foresee that welfare would become a substitute for family and that Continentals would simply cease breeding. Bismarckian-Rooseveltian pension plans assumed you’d be living off them for the last couple of years of your life. Instead, citizens of developed nations expect to spend the final third of their adult lives enjoying a prolonged taxpayer-funded holiday weekend.
Monday, April 18, 2011
What Downgrade? Pros Shrug Off Warning From S&P
From: CNBC
Investor reaction to the Standard & Poor's warning about burgeoning US fiscal problems was swift if unpredictable: Bonds and currencies, which otherwise might have fallen, gained, while stocks, which could have benefited, lost.
Investor reaction to the Standard & Poor's warning about burgeoning US fiscal problems was swift if unpredictable: Bonds and currencies, which otherwise might have fallen, gained, while stocks, which could have benefited, lost.
The S&P cut to the US outlook, after all, should have reflected itself in the nation's credit quality.
That in turn would have hit debt prices and shaken faith in the currency. At the same time, equities should have gone on their merry way on the belief that the money flowing out of fixed income would have found a home in stocks.
Seeing that none of the logical events actually occurred led to the belief in some quarters that the reaction from capital markets to the S&P move was a lot less than met the eye.
"The whole thing makes no sense to me," said Aaron Gurwitz, chief investment officer at Barclays Wealth in New York. "I can't tell a consistent story that explains all of these facts. My working hypothesis is this whole things is ephemeral—people were looking for a reason to sell stocks today."
From an investment perspective, Gurwitz said the only real takeaway is perhaps a less constructive view on the US dollar, which continues to be in jeopardy of losing its status as the world's reserve currency. Even in that case, the dollar gained Monday as measured against a basket of foreign currencies.
Gurwitz, like others, expects the stock plunge to be a short-term event that will lose steam quickly.
"We're encouraging our clients everywhere and in the US in particular to ask, 'What percentage of my assets are denominated in dollars?'" he said. "If it's about 85 percent, then people may want to think about diversifying a little bit more."
But elsewhere, it was almost as if the steep sell off in the stock market was happening on some other plane.
Theories regarding the day's pullback ran beyond the S&P move, and many strategists advised against using the news as a selling point. Dave Lutz, managing director of trading at Stifel Nicolaus in Baltimore, surmised that it was far more about a rally in the yen than a threat of US debt default.
Others, in fact, said pay no attention to the pullback, or at worst use it as reason to build up some more stocks.
"The more likely outcome is this is a buying opportunity," said James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis. "We're down almost 2 percent today because of some agency's stated opinion on something. There's a lot of opinions every day. It's not like there's a fundamental change from where we were last Friday."
In fact, several economists said the S&P warning could serve as an effective cattle prod to get Washington's warring parties to the bargaining table.
"S&P's actions could help advance the process toward a long-run strategy," David Resler, chief economist at Nomura Securities in New York, wrote in a note to clients. "By entering the debate in this way and at this time, S&P has served a useful public service by putting all parties on notice that words and actions in the political debate have consequences."
John Higgins, senior market economist at Capital Economics in London, combined the theme of a buying opportunity with the notion of good timing by S&P—even as Paul Ashworth, his Toronto colleague and chief US economist at the firm, said it was "hard to argue" with the downgrade.
"Investors might come to see S&P’s decision in a positive light if it prompts Congress to focus on delivering a credible deficit reduction plan," Higgins wrote in a research note. "After all, the rating agency’s decision to put the UK’s AAA-rating on negative outlook in May 2009 fueled a debate on the need for massive fiscal tightening, and the tough decisions taken by the new coalition government were eventually rewarded by S&P with the UK’s outlook being revised back up to stable in October last year."
Indeed, those looking for positive straws to grasp at considering the S&P's bleak assessment of US finances turned their gaze around the world and found few rivals for the dollar and the US as an investment destination.
"In this world today, the United States, from the size of capital markets and its political system, even though we're all frustrated, screams out stability," said Bob Andres, CIO at Merion Wealth Partners, in Berwyn, Pa. "That's reality vis-a-vis the rest of the world. With the amount of money out there there's not a lot of capital markets that do what the United States does, so where are these guys going to go?"
Still, disregarding the S&P warnings comes with risk, particularly if all of the buoyant voices are wrong and Washington pays no heed to S&P's shot across the bow.
The Federal Reserve can't keep printing money forever to pay the US debt, and the market faces its sternest test yet in two months when the central bank pulls its Treasury-buying program that has injected so much liquidity into the investing stream.
If any reason, then, is to be taken from Monday's market action, it's that for once the equity side, rather than the bond crowd, may become the new vigilantes. That's usually the job for fixed income, but short-dated Treasurys recouped losses that came immediately after the S&P news broke.
"It's just a warning, and there's still enough credibility in the government that the drop in price and rise in yields was attractive to some investors considering what's going on in Europe," said Kim Rupert, managing director of global fixed income analyst at Action Economics in San Francisco. "There's going to be a day where that's not going to happen unless we start to get our house in order."
Stocks plunge after S&P shifts rating on US debt to negative
From: The Hill
“Today’s announcement makes clear that the debt limit increase proposed by the Obama Administration must be accompanied by meaningful fiscal reforms that immediately reduce federal spending and stop our nation from digging itself further into debt,” House Majority Leader Eric Cantor (R-Va.) said in a statement.
Standard & Poor’s Ratings Services announced Monday it was lowering its outlook on U.S. debt from “stable” to “negative.”
Markets immediately fell on the news, with the Dow Jones Industrial Average dropping 214 points or 1.74 percent, as of 1 p.m.
Republicans cast the report as a wake-up call underlining their arguments that the administration should accept significant spending cuts in exchange for raising the nation's debt ceiling, while the White House said it underscored the need for a bipartisan deal.
Administration officials downplayed the report and said S&P was underestimating the ability of Congress and the White House to reach a deal.
White House press secretary Jay Carney predicted the “political process will outperform S&P expectations.”
“We think a reminder that we need an agreement on fiscal reform is always valuable,” he added at the White House press briefing.
Separately, House Democrats seized on the report as an argument that the GOP should allow a “clean” vote on a measure to raise the nation’s $14.3 trillion debt ceiling. Republicans have been demanding spending concessions from the administration in exchange for raising the debt ceiling.
House Minority Leader Nancy Pelosi (D-Calif.) said the S&P report highlights the need to participate in debt talks to begin next month under the leadership of Vice President Joe Biden. She pointed out in a release that she has named Reps. Jim Clyburn (D-S.C.) and Chris Van Hollen (D-Md.) to the Biden talks. The GOP has yet to name participants.
President Obama and Republicans for the last week have exchanged shots over the deficit, and some Republicans argued the president’s harsh criticism of the House GOP budget would make it tougher to reach an agreement.
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