Well it happened--after markets closed, S&P officially downgraded the credit rating of the US. This is a truly historic occurrence which will have far reaching impact on the economy and financial markets. The real question is: What will the stock market do? Will we swoon limit down or shrug off the news and dismiss S&P as a totally irrelevant entity?
A few facts to consider:
The US should have been downgraded years ago. Specifically, when the Federal Reserve decided to monetize US debt in late 2008-early 2009. This action should have been considered an unofficial default by all three major ratings agencies. Countries that print money to pay their debts do not deserve an AAA rating.
The US has defaulted on its debt before. In 1933, war criminal and traitor Franklin Roosevelt took the US off the gold standard and devalued the dollar by over 60%. Why on earth the US was not downgraded for this goes to show just how worthless the ratings agencies are.
A debt downgrade is not the end of the world. Japan lost its coveted AAA rating in 2001. At first, pundits declared that bond yields would surge as investors flee. What happened? Take a look at the "fear and panic" in the JGB market. Oh--that's right nothing happened. People continued to buy JGBs and today Japan enjoys the lowest bond yields on the planet.
The real question is: What happens to the market? I believe this to be a very negative psychological event which comes at the worst possible time for an already fragile stock market. Numerous hedge funds have blown up this week leading to margin calls and liquidations. Investors are scared about the EU debt crisis, and we need a US debt downgrade like we need a bullet in the head. This downgrade could be the tipping point which leads to more selling.
Gold--If you are like me and own gold, you are in nirvana. The gold bugs have been proved correct. The dollar and US debt are no longer safe havens anymore. It is hard to say gold does not continue to surge as investors rush to the ultimate safe haven of gold.
The dollar and Treasuries may rally. I know it sounds absurd, even illogical to suggest the dollar and Treasuries could increase on news of the downgrade, but consider the following: The US is the world's reserve currency with the largest, most liquid debt market. There is simply no alternative for global investors to flee to. What, are they going to buy the euro when it is on the verge of collapse? I think not. As much as I like gold, there is not enough gold to handle trillions of dollar denominated assets. Furthermore, most Asian central banks (including China) will continue to buy US dollars and US debt to keep their currencies from appreciating against the dollar.
By the way, if you look at the chart below, you will see that quite a few bond investors knew in advance of the S&P downgrade (e.g. Bill Gross, etc). Someone wanted out of US bonds before the end of the day.
Obama will go down in history as an unmitigated failure, just like George W Bush. Obama will be the first President to preside over a US downgrade. I don't blame him for his incompetence and lack of leadership. I blame the dumbed down piece of filth Americans who voted this supercilious jackass into the White House. Everyone one of you who voted for him should be stripped of your constitutional rights immediately. You voted for a low-life community organizer from Chicago with no experience into the highest and most powerful job in the world. I remember watching the cheering fools, celebrating Obama's victory. People were running around claiming that the US would be saved and that they would not have to worry about their mortgage or gas bill anymore thanks to Obama. LMAO! Well, now you are stuck with a mental midget in the White House whose only concern is playing basketball with the secret service and vacationing at Martha's Vineyard. He does not give a damn that Rome is burning; he is too busy holding fundraisers and selling out the country.
America you got what you deserved! I hope you can live with the fall-out. I bet you will re-elect Obama in 2012 just to prove how stupid you really are.
Don't blame me, I voted for Ron Paul in 2008 (and will again in 2012).
Black Swan Insights