Free Markets, Free People

Daily Archives: August 5, 2011


S&P downgrade coming tonight? (Updated: Downgrade: AA+)

Well, this is encouraging:

U.S. government officials are bracing for the rating agency Standard & Poor’s to downgrade the country’s credit as early as this evening or take other possible action, according to someone familiar with the matter.

Open comment thread to answer the question: How screwed are we?

UPDATE: ABC news adds more:

A government official tells ABC News that the federal government is expecting and preparing for bond rating agency Standard & Poor’s to downgrade the rating of US debt from its current AAA value.

Officials reasons given will be the political confusion surrounding the process of raising the debt ceiling, and lack of confidence that the political system will be able to agree to more deficit reduction. A source says Republicans saying that they refuse to accept any tax increases as part of a larger deal will be part of the reason cited. [Emphasis added—Ed.]

So, it’s all your fault, Republicans.

UPDATE II: Politico’s Ben White (@morningmoneyben) tweets, "Senior govt official tells me S&P had planned to downgrade 2nite. And now may not. Weirder and weirder".

UPDATE III: Jake Tapper updated the ABC story above with new developments:

A third official says that S&P made a "serious mistake" in its analysis, "based on flawed math and assumptions," so the Obama administration is pushing back. But even though "S&P has acknowledged its numbers are wrong, it’s unclear what they’re going to do.," the official said.

S&P refused to comment.

What a strange set of developments.

Update IV: The Wall Street Journal provides a clearer look at what’s happening:

A mathematical error discovered late Friday by Treasury Department officials threw into limbo, at least temporarily, plans by ratings firm Standard & Poor’s to downgrade the top-notch AAA credit rating the U.S. has held for 70 years, people familiar with the matter said…

S&P officials notified the Treasury Department early Friday afternoon it was planning to downgrade the debt, a government official said, and the firm presented its report to the White House. S&P has previously warned such a downgrade might come if Washington didn’t move to comprehensively tackle its long-term fiscal woes.

After two hours of analysis, Treasury officials discovered that S&P officials had miscalculated future deficit projections by close to $2 trillion. It immediately notified the company of the mistakes.

S&P officials later called administration officials back to say they agreed about the mistakes, though they didn’t say whether it would affect the rating. White House officials remained waiting Friday evening to see what the company would do.

That’s an enormous mistake for S&P. If you’re about to issue a downgrade to the United States, you’d better check yourself, son.  After this, the Treasury Department will go to the wall on S&P if they try to downgrade.

Big black eye for Standard & Poor.

UPDATE V: Holy crap! CBS White House reporter Mark Knoller (@markknoller) just tweeted: “S&P has downgraded US Treasury securities from AAA to AA+. S&P bills downgrade as an ‘unsolicited rating.’" Oh, it’s on now. S&P has got big brass ones, because the Treasury Department and White House will now go 10-8 on their ass, after finding that $2 trillion math error.

UPDATE VI: Well, the first responses for the downgrade are in at Reuters. They seem pretty measured. Optimistic even.

~
Dale Franks
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Nobel Prize-winning economist endorses my economic analysis

Well, this is interesting.  Paul Krugman finally agrees with me:

[W]e already know what isn’t working: the economic policy of the past two years — and the millions of Americans who should have jobs, but don’t."

I’d just like to point out that I knew those economic policies wouldn’t work back in 2009, writing about them here. Since then, I’ve just been watching the kangaroo. So It’s nice to see Krugman joining me in declaring "fail"—though he does so with the advantage of 20/20 hindsight.

I eagerly anticipate my upcoming invitation to Sweden.

Where we diverge is in providing solutions. As always, Krugman’s solution is more spending, and more debt.  But with debt already at 100% of GDP, we’re really in uncharted waters, and I have no confidence that more debt is the answer, if the problem is the existing debt overhang.

The real question I’m concentrating on is, "At what point do the markets recognize not only that the debt path we’re on is unsustainable, but that it is going to be impossible to pay it back?"  Is that 120% of GDP? 150%?  I don’t know.  But I fear that we’re going to learn the answer.

On the bright side, I’ll be able to pay off the remaining 19 years of my mortgage for the cost of a nice hat. On the down side, a new Astros baseball cap will cost $200,000. On the bright side, again, the $100,000 from my Nobel will cover half of that, so it’s all good.

~
Dale Franks
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Arctic ice–no tipping point

Remember we were warned by alarmist scientists that our contribution to the CO2 output of the planet was enough to push the warming effect past a tipping point such that the arctic ice pack would disappear … for good.   Well, now there’s new evidence (piled upon all sorts of other new evidence) that no such thing is immanent.

Scientists say current concerns over a tipping point in the disappearance of Arctic sea ice may be misplaced.

Danish researchers analysed ancient pieces of driftwood in north Greenland which they say is an accurate way to measure the extent of ancient ice loss.

Writing in the journal Science, the team found evidence that ice levels were about 50% lower 5,000 years ago.

They say changes to wind systems can slow down the rate of melting.

They argue, therefore, that a tipping point under current scenarios is unlikely.

Well, there goes another one.  Seeing a pattern forming here yet?  At some point, someone on the other side, with at least a shred of integrity left ought to stand up and say, “okay, enough.  And speaking of enough, it should be clear to all of us now we don’t have enough information or data to be making the wild-assed predictions we made based in dubious information and obviously inaccurate modeling”.

Yeah, that’ll happen.

Right?

~McQ

Twitter: @McQandO


Gloomy Goldman-Sachs

James Pethokoukis writes, "Goldman Sachs drops this H-bomb on the Obama campaign:

We have lowered our forecast for US real GDP growth further and now expect real GDP to grow just 2%-2½% through the end of 2012.  Our forecast for annual average GDP growth has fallen to 1.7% in 2011 (from 1.8%) and to 2.1% in 2012 (from 3.0%).  Since this pace is slightly below the US economy’s potential, we now expect the unemployment rate to be at 9¼% by the end of 2012, slightly above the current level.

Even our new forecast is subject to meaningful downside risk.

So, we got that goin’ for us.

~
Dale Franks
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Unemployment situation for July

The headline numbers for the the July employment situation show that 117,000 new non-farm payroll jobs were added last month, while the unemployment rate dropped to 9.1%. But, the true story is—as we’ve come to expect—more complicated when you delve below the fold.

Private payrolls rose by 154,000 jobs, while government payrolls declined by 37,000. Average weekly hours were unchanged at 34.3, while hourly earning rose slightly to $23.13.

The decline in the unemployment rate to 9.1 was not a reflection of the increase in non-farm payrolls, but a decline of 193,000 in the labor force, as workers dropped out of the labor market. As a result, the labor force participation rate continued to decline to 63.9%.  In addition, the total number of employed persons declined from 139,334,000 to 139,296,000, meaning that 38,000 fewer people were actually working last month, compared to June.

The U-4 unemployment rate, which includes discouraged workers, held steady at 9.8%, while the broadest measure of unemployment/underemployment, the U-6, which includes workers who have part-time jobs for economic reasons, dropped 0.1% to 16.1%.

Overall, the report is not positive. At best, it can be said that we’re about the same last month as we were in June.  The trend over the last few months is not good, however, as the table below illustrates.

 

  Mar 2011 July 2011
U-4 9.4% 9.8%
U-6 15.7% 16.1%

 

Finally, if we go back to the historical average of labor force participation prior to the recession, which was 66.2%, the proper size of the labor force should be 158,662,000, rather than 153,228,000. Use that figure to calculate the employment rate with the 139,334,000 persons actually employed, and you get an actual unemployment rate of 12.2% for July. The caveat here, of course, is that with the first tranche of Baby Boomers so close to retirement, some number have just retired early and are out of the labor force permanently, so that historical participation rate may no longer be valid.

In any event, once you add in the workers who’ve gotten discouraged, and workers who have part-time jobs because full-time employment isn’t available, this month’s employment report makes it clear that real unemployment is actually back on the rise.

~
Dale Franks
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The economy–how bad is it?

One of the well known institutions that politicians like to point to when things are going well or bad is Wall Street’s stock markets.  They’re an indicator that at times are used to point out that things aren’t as bad as they seem and as well as illustrate how bad things really are.

Today is one of those latter examples.  The Dow and other indices plunged.  The Dow Jones Industrial is off 512 points, its 9th steepest drop ever.

chart_ws_index_dow_20118414253.top

 

The question of course is “why” and what one has to hope is the answer is something to do with a temporary situation.   But it doesn’t appear that’s the case.   Looking out at the broad economy, it seems, investors don’t at all like what they see.  Add the government’s continued inability to address the debt and deficit and you have what could be the beginning of many down days on the street.

"The conventional wisdom on Wall Street was that the economy was growing — that the worst was behind us," said Peter Schiff, president of Euro Pacific Capital. "Now what people are realizing is the stimulus didn’t work, and we may be headed back to recession."

That’s not what you want to hear when you’re hoping to see investment and an economy turn around.  And unfortunately, Wall Street is a place with a herd mentality, and when some investors get spooked, they all get spooked.  Yesterday indicated they’re spooked.

There’s "total fear" in the market, said Bob Doll, chief equity strategist at the world’s largest money manager, BlackRock.

European and Japanese policy makers had to step in and shore up their markets as the sell off gained momentum.

"In the last two weeks, we’ve been through the ringer," said Rich Ilczyszyn, market strategist with futures broker Lind-Waldock. "When we start looking at the recovery, there’s nothing to hang our hats on anymore."

So despite assurances that a “deal” to raise the debt limit would have a calming effect on world markets, the reality is it didn’t.  And Europe is in pretty deep trouble which is also reflected in this loss.  Add in the poor economic reports here that continue to pile one on the other and you have a situation that looks increasingly bleak.  The unemployment report today is most likely only going to underline that fact with most economists expect poor job growth to continue and the unemployment rate to stay at 9.2%.  And now the Dow has lost all of what it had gained in 2011.

Stay tuned.  Rocky road (continues) ahead.

~McQ

Twitter: @McQandO

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