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Well we’ve done it. It’s official. The partisan
bickering in Congress has managed to snatch defeat from the mouth of victory.
I have written that I find it incredibly ironical that if S&P had done
their job properly in the years of 2000 – 2007 we would not find
ourselves in this economic morass. When the banks were selling these toilet
paper mortgages, toxic assets and bundling them together as CDO’s who
was stamping them “AAA”? S&P. S&P is a culpable for the
collapse of the economic system as any of the greedy bankers. In my opinion
they are more to blame. It was their job to make sure that this kind of greed
and arrogance would not be tolerated. Instead
they were willing co-conspirators in this fraud that was perpetrated on the
ill educated middle class.
So we are here now. The S&P removed the United States
from its list of risk free borrowers for the first time in history Friday
night. You can read the entire S&P Report here. This downgrade is fraught with symbolic significance but
carries a few crystal clear financial messages. It characterized the
downgrade as a judgment about our political leaders. It is clear that the
divergence between our political parties had reduced the world’s
confidence in our government to manage our finances. In my reading of the
report I conclude that the downgrade reflected the effectiveness, stability
and predictability of the American political institutions during this time of
ongoing fiscal and economic challenge.
Pathetically, President Obama’s administration
reacted as scripted, with indignation stating that S&P had made a
mathematical error by overstating the debt by $2 trillion. Excuse me Mr. President but that
seems like a pretty big mistake for anyone to make. Exactly how many zeros
are there after the 2 for 2 trillion?
The official story is that on Friday, after the market had
closed S&P notified the Treasury of its intention to issue a downgrade
and sent the department a copy of the announcement which is standard
procedure. Within an hour a staff member noticed the $2trillion dollar
mistake and called the company and explained the problem. About an hour later
the company conceded the problem and issued a new release but with new
numbers and the same conclusion. Saturday S&P released a terse statement
attributing the error to a change in assumptions in its methodology but that
it had no impact on the rating decision - “AA” it will remain.
Indeed in the release on Saturday S&P warned that the government needed
to make progress paying its debts in order to avoid further downgrades.
The truth is that the credit rating agencies have been
trying to restore their credibility since they got caught with their hand in
the cookie jar of the economic collapse of the banking system. A
Congressional panel called them “essential cogs in the wheel of
financial destruction” after their greed and avarice led them to stamp
the garbage CDO’s “AAA”. There are many who see this as a
ploy by S&P to clean their tarnished image by pouring gasoline on the
fire. Well if they wanted to get everyone’s attention it worked. In my
opinion they just look like bigger fools than ever. Indeed, S&P are
confronting many investors who consider U.S. Treasuries to be the safest
investments in the world. It seems to me that S&P is on a suicide
mission. They seem to be even dumber than I thought. As they seem to be on
the fast track to become irrelevant as soon as possible.
So who will suffer the most? The middle class will, of
course. The bad news for the middle class will be that the downgrade might
cause investors to demand higher interest rates causing the ripple effect of
higher borrowing costs for small businesses, credit card debt, car loans, home
mortgages there by slowing the rate of the already tepid economic recovery.
This is exactly what we don’t need now. In fairness Moody’s and Fitch
have not downgraded out rating so many analysts are hoping that the impact to
our economy is modest.
As I have often written, I do not
like words like hope or wish. I trade the market on probabilities and with
the Israel market closing down 6% what do you think the probability is that
we will see a bounce in the market tomorrow. I give it a 10% chance.
There will be Dark Days ahead as
there will need to be massive tax hikes and / or massive cuts to entitlement
programs. There will be hikes in the age of retirement eligibility and cuts
in Medicare. Both programs long believed to be sacrosanct. Yes there will be
massive cuts to our national defense budget as well.
Somehow I doubt there will be any cuts in the pay of
congressmen or any cuts in their health care or retirement programs. Just
call it a gut feeling.
So how do we play this market today? As you all know the
S&P downgrade came after the market closed on Friday, the S&P 500
futures remained down only two points for the first few minutes after the
news broke and ended the after-hours session only five points lower.
That’s because the news event was initially met with a mild
response.
Today, however, Middle Eastern markets closed sharply
lower. Asian Markets closed lower and European markets have opened lower. It
is difficult to see how this unusual news event will play out here. The
trading recommendation for tomorrow and Tuesday is traders should stand
aside. It is important to realize that bad news following a large sell-off
may well produce a bottom. The difficulty, of course, is determining the
level at which the bottom will occur. Be patient and sit on your hands. With The Silver ETF (SLV) if the
market pulls back to $32.50 buy in. If GLD pulls back to $145.00 buy in
otherwise don’t buy anything. Sometimes Doing
Nothing is Doing Something!
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