The markets were roiled by the S&P DOWNGRADE of the U.S. DEBT outlook to a “negative” while maintaining the AAA rating. This really could be of no surprise to those who follow the markets closely. The initial reaction was to sell the equities and BONDS. The surprise was that the U.S. DOLLAR was bought aggressively. All of these trades were short-lived as the S&P closed against recent highs today and the BONDS rallied back immediately on Monday although they have softened with the strength in the EQUITY markets. The DOLLAR was purportedly bid because of the FINNISH vote on Sunday night and of rumors of a GREEK restructuring.
Currently, the EURO is making 15-month highs versus the DOLLAR and all other currencies have also rallied strongly versus the GREENBACK. It seems that if a successful BUDGET negotiation takes place, which means some sense of fiscal austerity, the FED will be reluctant to raise rates even as it pulls back from QE2. The fact that 2012 is a presidential election year will make the political background very murky. The market will test the LEADERSHIP skills of the PRESIDENT as well as CONGRESS for the world will be wanting to know if the timeline for the U.S. has finally reached the point that the world’s largest DEBTOR finally finds the strength to end its profligate,irresponsible ways.
For the past three decades there have been numerous blue ribbon panels dealing with the coming DEBT problems and every panel’s outcome merely made for a quality door stopper. Has the time arrived that the issue of U.S. over-indebtedness is to be taken seriously? This is the big issue that the markets will be faced with coming into the 2012 election cycle. The only outcome I can reasonably predict is the volatility will increase and be headline driven and whatever happens we will continually have BRUSSELS.
One quick issue that needs to be brought to everyone’s attention: In Tuesday’s Financial Times there is an article by James Politi with the headline, “Recriminations Fly Over S&P’s Warning Shot.” The article is nothing special but a paragraph embedded in the piece raises questions. Politi notes that:
“Administration officials–who had only been briefed over the weekend about the S&P move–were certainly not pleased.”
It is followed by a quote from assistant Treasury Secretary Mary Miller, who responded that “S&P’s NEGATIVE OUTLOOK UNDERESTIMATES THE ABILITY OF AMERICA’S LEADERS TO COME TOGETHER TO ADDRESS THE DIFFICULT FISCAL CHALLENGES FACING THE NATION.” Ms.Miller’s comment is only part of the problem for did she so quickly forget the BENIGN NEGLECT that greeted the BOWLES-SIMPSON BUDGET RECOMMENDATIONS?
My bigger issue is that S&P briefed the ADMINISTRATION during the weekend but yet the news broke just as the NYSE was opening. Now I know one thing about the nation’s CAPITOL and that’s nothing of such significance remains a secret. I wonder who had this knowledge and when they decided to act on it. Now it seems that it’s not only stocks that deserve the scrutiny of insider trading. This brings new meaning to the idea of INSIDE THE BELTWAY!
Tags: bonds, Bowles-Simpson, budget negotiation, Congress, Dollar, equity markets, Euro, Fed, Financial Times, Greek restructuring, Mary Miller, NYSE, president, QE2, S&P downgrade, U.S. debt
April 21, 2011 at 12:22 am |
lobbyist for big Corporations and hedgies,banks et al don’t
have 2 million a year dinner budgets for the presidential circuit for nothing
April 21, 2011 at 4:37 am |
Again it isn’t like the old days. When the US announced buying their own debt it was the signal for me to sell $’s and Euro dollars. Within 2 hours I was pleading to let me out of the trap I don’t want the cheese. It amounts to yield to the lender isn’t appealing so they gravitate in directions unlike the trends of the past.
April 21, 2011 at 7:29 am |
Whitewave–Bingo.I must have missed the 36000 a plate dinner at MK’s –a man of the people –what do you buy for the money.If Iwas Galleon’s attorney I would be revealing the Davos meeting as an insider’s paradise
April 21, 2011 at 9:25 am |
This is a very important point in the grand scheme of things:
“It seems that if a successful BUDGET negotiation takes place, which means some sense of fiscal austerity, the FED will be reluctant to raise rates even as it pulls back from QE2.”
The economy is impacted by monetary policy and fiscal policy. It seems like most pundits fail to discuss the two from a wholistic perspective but rather they only address one at a time. I will concede that the Fed should raise rates to at least 1% just so there is some balance restored to those who save money. BUT…in the context of forming an economic outlook on a wholistic basis, what is the difference between monetary stimulus vs. fiscal stimulus via deficit spending? My initial thought is that there is no difference-beyond the return on investment from each method. Which if that point is true…removing fiscal stimulus (a.k.a. deficit spending) from the picture IS in fact a re-normalizing economic policy change which leads me to believe that the Fed doesn’t necessarily have to raise interest rates so long as fiscal policy is restored to something that resembles prudence. There will naturally be some degree of “WHOA” applied to the reigns of the economy and the Fed can evaluate further action after the impact is measured.
Extending the discussion a bit further…
My intuition coupled with cynicism suggests that every dollar of fiscal stimulus is actually less effecient in terms of return on investment to the economy vs. every dollar of monetary stimulus provided by the Federal Reserve. In part I believe this because fiscal stimulus is laced so badly with poorly thought out, semi-corrupt politicians re-election interest and buddy systems (sometimes called chroni capitalism) vs. prudent allocators of capital. Thus I am naturally leaning on the side that fiscal stimulus needs to be removed before monetary stimulus IF they had to be ranked by priority.
All this aside, savers should be compensated for their decision to save as opposed to spend.
Hope everyone has a nice Easter.
Danny
April 21, 2011 at 1:28 pm |
Danny–this is a great post.If the peripheries are worth anything in real time it is as a look at the impact of austerity budgets on growth.Remember that the Greeks and Irish et al do not control their monetary policies and are thus captives of the Brussels Bureaucrats–the U.S. controls it monetary policy so the FED will be able to take a “softer” approach to judge the impact of any potential budgetary austerity.Many people are betting for a Fed rate rise which they should do,but certainly a real budget compromise will change the near term landscape—-Happy Holidays and thanks for the feedback
April 21, 2011 at 3:25 pm |
Always an interesting debate. In this case, I´d agree with “Dr. Gloom” Roubini, he argues that the US is much better off than Europe…
http://ai-cio.com/channel/NEWSMAKERS/%E2%80%9CDr__Doom_s%E2%80%9D_Firm%2C_in_Counterintuitive_Claim%2C_Says_US_Better_Off_Than_Europe.html
April 22, 2011 at 1:58 pm |
“A weak dollar isn’t necessarily a bad thing”, said Kenneth Rogoff.
http://www.washingtonpost.com/business/economy/the-dollar-less-almighty-big-investors-see-possible-long-term-currency-weakness/2011/04/19/AFxVaKLE_story.html?hpid=z1
April 22, 2011 at 2:38 pm |
By the way, any comment about Canada inflation?
http://www.reuters.com/article/2011/04/19/canada-economy-idUSN1927414620110419
April 22, 2011 at 10:34 pm |
[…] dollar didn’t crater yesterday, but markets were closed. My buddy Yra has been on […]
April 24, 2011 at 9:23 am |
On the rogoff statement–that may well be true but it doesn’t come without some real pain –but if the DOLLAR drops enough teh U.S. economy will see some benefit in terms of trade and all those weakening DOLLARS make their way back into the U.S. as the only place they will have maintained some value.I believe that the private equity bigshots are positioning themselves for that possibility hence I have written over the last 16 months on why it is important to watch Blackstone.Blackrock.Ochs-Ziff and others.The problem with a weak dollar creating U.S. investment opportunities for foreign investors is of course CFIUS–but it is certainly something to be aware of.If the inflationary impact of a severely debased DOLLAR can be controlled Rogoff may be proven correct
April 24, 2011 at 9:25 am |
The only thing to say about Canadian Inflation is that the BOC may raise sooner then expected and also it calls into question the integrity of the U.S. data–that is the more important of the two for me.