{"id":23027,"date":"2011-08-09T07:08:00","date_gmt":"2011-08-09T11:08:00","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=23027"},"modified":"2011-08-09T07:08:00","modified_gmt":"2011-08-09T11:08:00","slug":"why-the-u-s-downgrade-matters","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/08\/09\/why-the-u-s-downgrade-matters\/","title":{"rendered":"Why the U.S. Downgrade Matters"},"content":{"rendered":"

By Kris Sayce<\/strong>
\nMoney Morning Australia<\/em><\/p>\n

The global economy is descending into a tailspin\u2026 mainstream share portfolios have been hammered\u2026 and the Aussie dollar has dropped 10% in less than two weeks.<\/p>\n

Just when you thought things couldn\u2019t get any worse\u2026<\/p>\n

Get ready, dear reader\u2026<\/p>\n

Because tonight the busy-bodies and sticky-beaks are set to descend in hordes\u2026 sticking their noses in where they\u2019re not wanted or needed.<\/p>\n

We refer, of course to the Census.<\/p>\n

Fortunately, your editor and family won\u2019t be at home tonight, so we don\u2019t need to fill out their intrusive form.<\/p>\n

Yet, the little Oompa Loompas bashing on millions of doors tonight aren\u2019t the only busy-bodies straying where they shouldn\u2019t.<\/p>\n

We noted with amusement the joint statement from the G-7.\u00a0 You can read the full text here<\/a>.\u00a0 But here are a few choice snippets:<\/p>\n

\u201cIn the face of renewed strains on financial markets, we, the finance ministers and central bank governors of the G7, affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close co-operation and confidence\u2026<\/em><\/p>\n

\u201cWe are committed to taking co-ordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth.\u201d<\/em><\/p><\/blockquote>\n

Despite everything that\u2019s happened, they still don\u2019t get it.<\/p>\n

The whole reason the market is in such a mess is because of \u201cfinance ministers and central bank governors\u2026 taking co-ordinated action\u2026\u201d<\/em><\/p>\n

They\u2019ve fiddled with the market for decades and what you\u2019re living through now is the result of that meddling.<\/p>\n

Looking to divert the blame<\/strong><\/p>\n

Not that they\u2019ll ever admit it.<\/p>\n

There are others to blame\u2026 apparently.<\/p>\n

Such as\u2026 Standard & Poor\u2019s \u2013 the ratings agency.<\/p>\n

As you know, we\u2019re no fan of ratings agencies.\u00a0 But it\u2019s pleasing to see they\u2019ve finally done their job \u2013 downgrading U.S. debt.\u00a0 It follows the downgrade of European sovereign debts \u2013 Greece, Ireland, Portugal, etc\u2026<\/p>\n

But certain people aren\u2019t happy.\u00a0 As Dan Denning, editor of the Daily Reckoning<\/a><\/em> noted this morning:<\/p>\n

\u201cIn Italy, prosecutors have raided the offices of Moody\u2019s and S&P and seized documents.\u201d<\/em><\/p><\/blockquote>\n

Meanwhile, in the U.S., the Washington Post<\/em> reports:<\/p>\n

\u201cA Senate Banking Committee aide says the Democratic-led panel is gathering information on Standard & Poor\u2019s decision to issue the first-ever downgrade of the government\u2019s credit rating.\u201d<\/em><\/p><\/blockquote>\n

Hmmm, perhaps the government is getting revenge on S&P for getting revenge on the government!<\/p>\n

All we know is it\u2019s a stinking great mess with governments and central bankers doing all they can to hold on to power.\u00a0 Trouble is, the more they tighten their grip, the more pain is inflicted on the average Joe and Joanne Punter.<\/p>\n

Zombie commentators still don\u2019t get it<\/strong><\/p>\n

But don\u2019t worry.\u00a0 According to the zombie mainstream Australian press, there\u2019s nothing much to worry about.<\/p>\n

Our old pal, Michael Pascoe at the Age<\/em> wrote yesterday:<\/p>\n

\u201cThe single-notch downgrade of the United States\u2019 long-term debt by Standard and Poor\u2019s makes for lots of impressive headlines, but it doesn\u2019t actually mean all that much in the short-term \u2013 just a historic market along the way of a great power\u2019s slide.\u201d<\/em><\/p><\/blockquote>\n

His Fairfax Media buddy, Jessica Irvine must have attended the same briefing yesterday morning.\u00a0 She wrote:<\/p>\n

\u201cSo in the short term, the credit downgrade potentially means next to nothing.\u201d<\/em><\/p><\/blockquote>\n

And finally, over at Business Spectator<\/em>, Alan Kohler had this to say:<\/p>\n

\u201cIt\u2019s impossible to predict how markets will react to the huge psychological element of Saturday\u2019s downgrade, but the reality is somewhat less huge.\u201d<\/em><\/p><\/blockquote>\n

Since the \u201cAustralia is different\u201d crowd published their thoughts yesterday morning, the Aussie stock market has officially crashed.\u00a0 Let\u2019s not beat about the bush here.\u00a0 Stocks have taken an almighty beating.<\/p>\n

In fact this morning, the S&P\/ASX 200 index is at 3,781.\u00a0 The market is now just 16% above the March 2009 lows.<\/p>\n

Make no mistake, the downgrade of U.S. debt is important.\u00a0 No investment is isolated.\u00a0 Every investment anywhere in the world is risk-rated to every other investment.<\/p>\n

Normally, when one asset class is re-rated it doesn\u2019t make much difference to other sectors (although it still makes some<\/em> difference).\u00a0 But when the re-rated asset is the global benchmark for all<\/em> other assets, contrary to mainstream opinion, it\u2019s a huge deal.<\/p>\n

This is Investment 101 stuff.\u00a0 To say the rating on the benchmark asset class can change without it causing ructions is simply wrong.\u00a0 The action you\u2019ve seen in the market the past two days proves that.<\/p>\n

Investors now have to figure out the relative risks of every asset and work out if it\u2019s overpriced or underpriced.\u00a0 They have to decide if the U.S. bond market is still a haven for investors.<\/p>\n

Some will decide it is.\u00a0 But others will decide it isn\u2019t.\u00a0 In that case, where do they go for safety?<\/p>\n

We don\u2019t know the answer to that.\u00a0 We do know two things: first, it creates huge volatility as investors reassess the market.\u00a0 And second, we can sure say they won\u2019t<\/em> flock to the Aussie dollar.\u00a0 The price action in the Aussie dollar versus the U.S. dollar is proof of that \u2013 it\u2019s back to parity as we write.<\/p>\n

And that\u2019s not all\u2026<\/p>\n

Early warning signals going mad<\/strong><\/p>\n

Our Early Warning Signals have gone berserk\u2026 the U.S. VIX index soared 50% last night to end the day at 48 \u2013 a level not seen since early 2009.<\/p>\n

The Aussie dollar has continued to slump against the Swiss Franc \u2013 the Aussie dollar\u2019s supposed haven status is looking weaker (and sillier) by the minute.<\/p>\n

And the gold price has taken off.\u00a0 Not only has the U.S. dollar gold price surged through $1,700, but the Aussie dollar gold price has quickly followed.<\/p>\n

It\u2019s a good job the U.S. downgrade isn\u2019t significant!\u00a0 And it\u2019s a good job Australia has China to fall back on!\u00a0 Not.<\/p>\n

Yesterday we wrote to you saying to get set to buy cheap stocks.\u00a0 This morning, those stocks \u2013 including the ones we\u2019ve got on our watchlist \u2013 have gotten much cheaper.<\/p>\n

The market remains as risky as heck.\u00a0 And just as we\u2019ve warned for the past two years, it\u2019s not the place to store your life\u2019s savings.<\/p>\n

But now you\u2019re flooded with cash, buying a select number of cheap stocks over the next few weeks makes a lot of sense.\u00a0 But only if you\u2019re comfortable taking risks.<\/strong> If not, stay in cash and bullion and wait for the volatility to ease.<\/p>\n

The way we look at it, if you don\u2019t like taking big risks there\u2019s no harm staying on the sidelines.\u00a0 If you miss the first 5-10% of a rally, it\u2019s not a big deal.\u00a0 At a time like this, capital preservation is more important for the risk averse.<\/p>\n

Cheers.<\/p>\n

Kris Sayce<\/strong>
\nMoney Morning Australia<\/em><\/p>\n

Why the U.S. Downgrade Matters <\/a><\/span><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

The global economy is descending into a tailspin\u2026 mainstream share portfolios have been hammered\u2026 and the Aussie dollar has dropped 10% in less than two weeks.<\/p>\n

Just when you thought things couldn\u2019t get any worse\u2026<\/p>\n

Get ready, dear reader\u2026<\/p>\n

Because tonight the busy-bodies and sticky-beaks are set to descend in hordes\u2026 sticking their noses in where they\u2019re not wanted or needed.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-23027","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/23027","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=23027"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/23027\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=23027"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=23027"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=23027"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}