Let's give S&P some credit here and I have given them little recently. They did wait until right after all trading, including after hours, had ended for the weekend to downgrade US government debt. Can you imagine what would have happened Friday if they had throw this little grenade into the market carnage then? Anyway this was not unexpected, they had been telegraphing it all week and obviously had given a heads up to the Obama administration since the administration had worked the last couple of days to get ahead of the news by putting out comments prior to the official release. Without a doubt the thing that hits me in the gut most is that our national debt is now not considered top notch. I am sad for the moment, but happy most of the World War Two generation is not around to see this, since they spend so many years sacrificing so their children could have this inheritance. Like spoiled kids the generations since have used and spent this inheritance and not been willing to do the same for their children. We get days on end of it is "not fair" from these supposed grownups who are actually behaving like spoiled brats on the playground. The downgrade is expected and frankly in my opinion long overdue. If you have been a reader of these posting I have for six months saying a US bond is not the safest savings instrument anymore.
The humor here is this downgrade is the direct result of the Dodd-Frank Financial Regulations bill passed by the Democratic Congress last year and hailed by President Obama as the end of financial problems as we know them. If you remember the rating agencies were taken to the woodshed over the lack of oversight on the federal housing agencies and institutional banks during the 2008 financial crisis. The were accused rightly of having basically embedded ratings on such agencies, banks, or other financial businesses and not taking a due diligence approach to their ratings. Let's also remember none other than the world renowned Warren Buffett, who is loved by the media for his tax raising desires, thought the rating agencies were hunky dory while he had very sizable investments in them. So now the rating agencies, led by the top one S&P, are doing due diligence and downgrading where they believe it is justified. Darn if they do not think that US Government debt is not AAA anymore and downgraded it. Hmm.,somehow I expect Senator Chris Dodd Congressman Barney Frank and President Obama did not have THIS particular downgrading in mind with the new law. Unintended consequences again. Also note that the Obama administration went after the messenger here and not the message. They know the downgrading is on their watch. So slur the messenger in hopes it hurts the integrity of the message. Hillary Clinton would be proud.
Now to the effect of this downgrade. I would expect little of no long term effect on the stock market Monday Morning. Maybe an initial sell off then back to business, or whatever business as usual is today. The effect on US Bonds is another matter, They could see some selling early on as institutions and pension funds who are required to hold only AAA bonds have to dump the treasuries and go to something else. That will cause some updraft in rates and loss of some principal. But note if people this week respond to the European crisis like they did by buying one and two year US treasuries, with inflation included, by paying the government to loan their money TO the government then prices will not be effected too much. However you could see some improvement in corporate AAA bonds since they are now considering safer than US treasuries. Add to that the fact that many state governments now have a better rating than US treasuries and they will benefit as well with cheaper borrowing costs. Strange that individual US state municipal bonds would now be a safer investment than US treasuries. That my readers is why I ONLY hold municipal bonds. States must balance their books and can not print money. I also see some lift in very blue chip stocks that pay good dividends as investors will take another look at them as well.
The end result here is that S&P noted that this is the first step towards a likely continued downgrading of US Treasuries. Also note that nowhere in the official 8 page S&P document does it say anything about raising taxes as helping improve the situation. It actually states that "spending" is the problem and must be addressed soon. I would expect the first signs of this on consumers will be increased borrowing rates for credit cards, houses, and cars since the downgrade will force the US to compete with more instruments when asking to borrow money. Most people in the US are right now oblivious to this downgrade action and just going on about their lives. Frankly they better begin paying attention, especially if you are young, since time to change to trajectory of the US financial situation is running out. With a forecasted one trillion dollar INTEREST only payment due in 2020 for the federal government lifestyles and choices as we know it are about to change in meaningful ways.
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