The first post-downgrade business day
The yield on the 10-year note has dropped to 2.44%, down from 2.57% at Friday’s close. I’m thinking this is telling us the economy’s on the way into the toilet, as the standard reaction for a credit downgrade is rising interest rates, to cover the extra risk. The Dow’s long slide, which began on 22 July–and continues with a 250 point loss so far today–is probably telling us the same thing, as earning expectations slide. Since the downgrade was one agency only, and the downgrade only to AA+, economic factors are clearly weighing more on the bonds than the downgrade. On the other hand, if you’re a gold investor, you’re probably a little happier today, as Gold hit $1,715/oz.
The key takeaway so far today is the continuing decline in yields, which isn’t good news. Thank goodness there’s no economic releases today. I’d hate to see what more bad news would bring.
So, back into recession, it looks like.
One of the more interesting things I’m wondering about, in a horrified kind of way, is what effect the downgrade has on corporate paper. A number of institutions have investment rules that require they concentrate their investments in AAA-rated securities. But, one of the general rating rules is that subsidiary corporate and government instruments cannot have a higher rating than their sovereign instruments. So if the US Government doesn’t have a AAA rating, no subsidiary US corporate or government paper should have a AAA rating either.
So, what does this mean for the handful of corporate and government instruments that were rated AAA prior to the downgrade? Do they get downgraded, too? If so, where do the institutions with a AAA rating requirement go with their money?
I’m not at all sure how this works. As we’ve been saying a lot in the last week or so, we’re in uncharted territory.
END OF DAY WRAP-UP: Well, that could’ve been worse, I suppose.
| INDEX | Close |
| Dow | 10,810.83 -634.76 (-5.55%) |
| S&P 500 | 1,119.46 -79.92 (-6.66%) |
| NASDAQ | 2,357,69 -174.72 (-6.90%) |
| 10-Year Yield | 2.34% -0.22% |
| Comex Gold | $1,710.20/oz (+3.7%) |
I’m not sure how much worse it could’ve been, though.
~
Dale Franks
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Two credit rating services warn US about possible downgrade in rating – again
While all the angst and hang-wringing continue over the Giffords shooting and the false flag of “vitriolic rhetoric”, Moody’s and Standard & Poor’s Corp have again warned the US it’s credit rating is in jeopardy:
Moody’s Investors Service said in a report that the U.S. will need to reverse an upward trajectory in the debt ratios to support its triple-A rating.
"We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase," said Sarah Carlson, senior analyst at Moody’s.
Standard & Poor’s Corp. also didn’t rule out changing the outlook for its U.S. sovereign-debt rating because of the recent deterioration of the country’s fiscal situation. The U.S. has a triple-A rating with a stable outlook at both raters.
"The view of markets is that the U.S. will continue to benefit from the exorbitant privilege linked to the U.S. dollar" to fund its deficits, Carol Sirou, head of S&P France, said at a conference in Paris on Thursday. "But that may change. We can’t rule out changing the outlook" on the U.S. sovereign debt rating in the future, she warned. She added the jobless nature of the U.S. recovery was one of the biggest threats to the U.S. economy. "No triple-A rating is forever," she said.
Note the line I emphasized. That is the primary reason it hasn’t happened yet. The dollar is the true benchmark currency of the world. Or perhaps a better way of saying that is it is the benchmark currency of the world at least for the time being. But busting through 14 trillion dollar debt ceilings and continuing uncontrolled spending is a very quick way to have other countries consider other currencies or perhaps a market basket of currencies to replace the dollar.
If that happens, our triple-A rating will disappear faster than a pizza at a Weight Watchers convention. But even if it doesn’t, we’re well on the way to a downgrade anyway:
The most recent official figures show the ratio of federal debt to revenue averaging 397% of gross domestic product in the period to 2020, while the ratio of interest to revenue will rise to 17.6% by 2020, from 8.6% in the last fiscal year. "These figures are "quite high for an Aaa-rated country," Moody’s said.
Debt affordability is "very important to the rating process," Ms. Carlson said. U.S. general government debt affordability, including states and municipalities, is "rising over time to a high level for an Aaa-rated country," the report said.
Or said more succinctly, the only thing keeping us at the Aaa level is the fact that we are the home of the dollar. Otherwise the ratios above would most likely have seen us downgraded already.
Comforting, no?
~McQ
Fox News Channel Dominates
I bring this story to your attention because of the questions it raises. First the story by Steve Krakauer – then the questions:
Fox News had its best January in the history of the network, and was the only cable news network to grow year-to-year.
FNC also had the top 13 programs on cable news in total viewers for the fifth month in a row, and the top 13 programs in the A25-54 demographic for the first time in more than five years.
• FNC grew in double digits in both total viewers and the A25-54 demographic from January 2009. In prime time, it was up 22% in total viewers and 51% in the demo[graphic]. CNN was down 34% and 37% and MSNBC down 26% and 38%. In total day, FNC was up 16% and 28%. CNN was down 34% and 41% and MSNBC down 28% and 39%. Last January all networks performed while with the Inauguration coverage. This month, the big political event was Scott Brown’s victory in Massachusetts, which FNC dominated in the ratings.
Fox News Channel has been a target of a concerted campaign by the White House to discredit it for a year. How well does that strategy seem to be working?
If, as the left likes to claim, FNC is simply a mouthpiece for the Republican party, what do these numbers tell us?
If, as the right contends, MSNBC is a shill for the left, what do its numbers tell us?
Why does FNC dominate the all important 25-54 demographic?
Last – do these numbers really portend anything of political significance, or does FNC just do a more entertaining (and dare I say it, more “fair and balanced”) job of presenting news and opinion?
~McQ