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Monday, April 18, 2011

A Debt Monger's Worst Nightmare or a Slap on the Wrist

Today's news of S&P downgrading the US debt stung the markets... kinda 

Can you really doubt S&P's logic on this one?

Hey America-- Get your Sh*t together
In 2003-2008, the U.S.’s general (total) government deficit fluctuated between 2% and 5% of GDP. Already noticeably larger than that of most ‘AAA’ rated sovereigns, it ballooned to more than 11% in 2009 and has yet to recover.
By only downgrading the US debt from stable to negative, was this move a debt monger's worst nightmare or just a slap on the wrist?
“Our negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years,” Mr. Swann said. “The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012.”
I say it is a slap on the wrist and also a creative response to Obama's recent debt plan to reduce debt by $4 trillion over 12 years.

Things I 'may' do over the next 12 years
  • Buy a boat
  • Have more kids
  • Run a marathon
  • Eat less red meat
  • Meet an alien for coffee
  • Win the $400 billion lottery
  • Learn how to talk with my butt
I hope we are able to reduce the budget by $4 trillion in 12 years-- that would be great, however, who will be calling Obama up on year 11 with a report card?  If Obama wins again, all bets are off.  If he loses, all bets are off.  This is just political dodge ball at this point and should be taken like most Poly-tic talk and FED speak-- in one ear and out the other. 

As for actual cuts to the budget, they will need to be VERY creative.  Health Care and Social Security are creeping closer and closer to 50% of the budget.  These costs will only expand.  Where will the cuts come from?  Transportation and Education?  Been there, done that.  Click on the link below and scroll down for an interactive image for a breakdown of the 2012 budget

white house.gov 2012 budget

I think we will have to do one of 2 things to reach a budget that is achievable and sustainable.  (1) Raise taxes, or (2) Kill 40 million baby boomers.  We could also ask for massive pay cuts for higher levels of government.  Funny how I see a sea of dead boomers before I see that happening.   

S&P rating cuts are NOT about QEII

According to S&P, QEII has nothing to do with this decision, but FNMA and FHLMC are big contributors to the kinda downgrade.  dirty mortgage GSE's are killing everything.
One of the pressures on the credit is analysts' estimate that it could cost the U.S. government up to "3.5% of GDP to appropriately capitalize and relaunch Fannie Mae and Freddie Mac" in addition to the 1% of GDP already invested.
... and in other, yet related news, Home builders sentiment sucked bottom yet again.
The National Association of Home Builders/Wells Fargo sentiment index declined to 16 this month from 17 in March, data from the Washington-based group showed today. A measure of sales expectations for the next six months dropped to the lowest level since October, and a gauge of current purchases also fell. Readings below 50 mean more respondents said conditions were poor.
This is on a gauge of 50+ being good.  A 17 to a 16 is the equivalent of going from 'losing the family dog to bone cancer,' to 'finding spouse in bed with business partner.'  We are still a long way from the bottom in housing and the declines will start to wipe away equity at the rate of light speed at the pace we are going if we dump Fannie and Freddie (ie. mortgage financing as we know it).  No private investment will lend money for 5% for 30 years-- not without 50% down and about 20% upfront in fees.  Many buyers in this imaginary home-buyer pool of unicorns and talking marshmallow men.

Stocks fall and bonds... rise?

In a classic move, equity indexes shrugged off a sure sign of a drop in the market and ended up the day only down about 1%, while bonds... rallied?

You would think this would be bond negative, but if this slap on the wrist becomes a debt monger's worst nightmare, raising short term rates would mean lower equity prices and strength in long bonds.  It's a long shot, but it could happen. 

QEII is ending soon as well, which makes EVERYONE question what will happen next-- the S&P was up 26% since QEII and there are many forces that say these gains are all fluff and once the feds go away from the market, the gains will follow. 

Time to go long TLT?

TLT looks to have bottomed at around 88 in early Feb and has had strong support at 90 other than this one incident.  With QEII ending in about a month and a half, investors look to be dipping back into bonds, and today despite a debt kinda downgrade. 

Of course, wizards can always ruin what should be a 'sure thing.' 

Expect QEIII (it will have a fancy name, but if it sounds like a stimulated duck...) to follow as soon as the S&P retracts 10 percent, maybe less. 

All in all, a busy day, but nothing more than a slap on the wrist with a kinda downgrade. 

Coming next-- government to S&P:  Raise that debt ceiling!  And by the way, S&P, shove your 'rating' system. 

Getting uglier by the day!  

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