Posted on 01/13/2012 1:54:41 PM PST by WellyP
"S & P just down graded French debt from AAA to AA+."
Austria just downgraded from AAA to AA+.
The UK will probably be next,still the signs from Spain and Italy while not very encouraging are a step up from Greece.More then likely the rot in Greece will be terminal but not for Europe.
Can’t S&P take a page from American Education, and just grade on a curve, instead of letting all these currencies “fail”?
Italy downgraded to BBB+.
They were selling new bonds THIS MORNING, knowing they had received the 24-hour downgrade notice.
What is the rating for junk.
The term “junk” isn’t official, it is really just bond market slang.
Anything below “BBB” S&P rating is considered “junk.” This corresponds to a Moody’s rating of “Baa” or lower.
That said....
when S&P downgrades *sovereign* debt to BBB+, or even higher (like “A”), I’d be getting out of it, pronto. The reason is that there are political considerations to factor in here, such as the number of pension and government funds that cannot, by the charter, hold non-investment grade paper. When they go to get out, there will be a HUGE rush for the door... and you could take a substantial loss while trying to sell if you wait for the “official” downgrade to “junk.”
They did that already in the run-up to 2008.
Sooner or later, Mr. Market discovers the truth. The bond ratings houses were found to have been grading on a curve... and it has brought the utility of their continued existence into question.
Hence why they’re being so aggressive in their downgrades now...
Aggressive? Must be a new definition...
UK, Germany and Canada aren’t in any great shakes either. Still taking on massive debt.
It is a relative term, to be certain.
What S&P is now doing would not have happened before 2008. They almost never downgraded first-world nation debt. They would have looked at the US and Eurozone leading countries as bulwarks that “just don’t default,” and treated it as a “political problem” followed by “we don’t grade politics.”
Ah... but now that the size of the shadow banking system has been revealed... they have little choice but to pay attention to couplings they previously ignored or simply knew nothing about. In part, these couplings have caused the very problems they’re now grading in the EU zone.
Let’s put it this way: Go back and look at the news articles from September, 2008 relating to a speech that the German finance minister, Steinbrueck, gave before the Bundestag. There, September, you will see the German finance minister waxing most pompous and puffy about the “Anglo-American” issues in world finance, how our bank leverage ratios were insanely high, yadda, yadda, how we had this “insane drive for profits,” blah, blah, blah.
Now, don’t get me wrong. The man was correct - we had insane leverage ratios in our banks - the i-banks were levered up as high as 30:1 and one as high as almost 40:1. That’s Crazy-Eddy levels of insane finance.
A scant three weeks later, he had to drink a nice tall beer stein of STFU... because it was “explained” to him by the German bankers (no doubt in hushed, hurried tones that Germans use when they’re very embarrassed) that, entschuldigung sie bei uns, Herr Minister... but our leverage ratios are up around, ooohhhh.... 40:1 to as much as 52:1.
Suddenly we heard not another peep out of the French and Germans on American or English bank ratios.
The ratings agencies could fairly be heard to gasp clear out to Hawaii when the news came out. Almost no one, even those inside the banking analysis community, knew just how levered up some of these highly august names were.
NOW, suddenly there was a stark choice in front of nations: Either let these banks go up in a puff of levered smoke, or put their national treasuries behind them. But when the reckoning started on the possible liabilities, it appeared that several countries *can’t* put the national treasury behind their banks without going down the road that Iceland did.
In the US, we have the Fed, who at one time had extended as much as $16 *t*rillion in swaps and other schemes to prop up the banking system. Some of that went to EU banks as well.
The Europeans, with their ECB and EMF... have nowhere near that level of funny money at their disposal. They have nothing quite like the Fed, they have nowhere near the political and monetary unity we do. The Europeans don’t even have numbers that go that high on their calculators.
Now the ratings agencies had to confront the obvious: There’s a very real possibility of sovereign default in the EU, and that can take down many banks inside the EU, which could take down other sovereigns. Now S&P (et al) had to do what they’ve never done before - give sovereign downgrades to countries that, while they richly deserved it, could visit political and regulatory responses to the ratings agencies for doing this. Here they can publish their opinions and claim “Freedom of speech” to avoid repercussion ... not so in the EU.
Let’s put it this way: I’m sure that it was not without some thought that S&P delivered the first, biggest downgrade to the US last summer. Now the EU nations cannot point a quavering finger in our direction and demand “Why aren’t those deadbeats AA+?”
Which is why I’ve been betting on deflation for a long, long time now.
I dropped out of the market back in ‘08, before the crash.
I was one of the few who were happy to see the market plunge, and plunge fast and hard.
I thought that finally, the market was getting put on fiscal sanity and that prices for goods would become affordable, particularly housing.
Yes, it crashed, but then the bailout came and prevented the tide from sweeping away all the malinvestments. Now the crash will be even longer and harder, and the US might not survive it.
Back in 2008, the US was only 65 percent in debt to GDP. Letting it all crash, would have meant a sharp and sudden recession, one that would have been over 2 years ago, and we’d be well on the road to recovery today. Instead, we’ve bought them out and now everything is pushing closer to the brink.
This was long overdue. Now, it’s just a question as to who else will get brought down.
I’m right there with you on the deflation outlook. Completely agree. At some point, the Fed will realize that they simply cannot credibly prop up the whole house of cards, and then the monetary supply will implode as debt is written down left, right and center.
re: let it all crash. Also in agreement. Yes, it would have been sharp and severe. There would have been men jumping out of skyscrapers, women tearing off their blouses on CNBC, dogs and cats sleeping together. There would have been about two weeks of non-stop higglety-pigglety turmoil, for sure.
Then people would have run out of adrenaline, news reporters and info-babes would have exhausted all the adjectives for “bad,” and “really, really bad” in their desktop thesauri, and saner heads would have started to prevail.
The path we’ve chosen appears to be the Japanese path, where we’re all going to sit around and pretend that the banks are a-OK in some form of financial kabuki theatre. They’re not, of course, which is a large reason why the economy will go practically nowhere for an extended period of time. No one will trust the financial sector, investors will continue to believe (and know) that the game is rigged. I don’t know what our version of Mrs. Wantanabe trading FX will be, but I’ll bet it will involve lots of gold and guns. ;-)
What it means, NVDave -
Is consigning my generation to the lost. I am NOT happy about this choice of direction.
Where’s the faith? Do the powers that be not trust the people to set things right again? Have they given up on us?
I graduated HS in 2000. It was a different world then. I’ve not had a day of my working life under ‘normal economic circumstances. Not one. What are you supposed to say to the kids like me where this has been our adult life?
I look at the figures for the 80s and 90s and it seems hard to believe that there were 20 years of pretty much uninterrupted growth. Then I look at mine, and things are a long way from recovering back to where I was at 18. It’s disheartening, is what it is. And it doesn’t look to be getting better.
The other thing, labor force participation, is back to where it was during the 50’s. I can’t imagine the lefties imagined that would happen. The time where there were stay at home moms, the rest of it. The revolution has ended and it’s the 50s that won. What do you think that’s going to do for my generation? This isn’t what we were taught when we were young, but I’ve learned over the past few years that very little of what I was taught wasn’t a lie.
Now that I’m changing careers (for a second time since retiring from engineering) and bouncing between two community colleges and am around a lot of young people, I have heard a lot of young people echo your sentiment.
First, all I can offer you younger people is this: Life is what you make of it. Anyone telling you that “formula XYZ” WILL result in ABC results is simply full of crap. There is no sure-fire formula.
Second, yes, most older people, especially the Baby Boomers, are liars and frauds in what they’re telling younger people today.
One of the things that makes me successful as an investor in markets is studying economic history. A big part of the root cause of the lies that have been fed to you and your generation (and the generation that will come behind you) is that the Baby Boomers, many of whom are educated far beyond their intellectual capacity for sound judgement and reason, lived in an anomalous era of stability, (relative) peace and incredible wealth generation. This anomaly became part of the Boomer mythology of “We’re so much smarter and better than everyone else.”
Well, they’re not. They just happened to be in the right place at the right time.
The situation that existed from 1947 to, oh, 2000 was NOT the norm. It was unprecedented in the history of western civilization. We had only “small” wars, rampant disease was conquered (check out what mortality rates for kids were prior to 1920... it wasn’t pretty - around 1900, as many as 30% of the infants died before becoming 1 year old in many US cities), food was plentiful, markets were expanding, wealth was spreading everywhere in the US, most everyone had electrical power, etc, etc, etc.
People in the Boomer generation in the US and western Europe literally are the first generation of humans on the planet to “have it all.” And they got to thinking it was the natural course of events.
It isn’t. Sorry to tell you young folks, but Hobbes’ description of life still is right around the corner - nasty, brutish and short. And to not put too fine a point on it, this anomalous period of history was brought to you courtesy of white males. That’s right, the feminists and minority grievance brigades will get their panties in a wad at this assertion, but the undeniable truth is that the American Pale Penis League were the ones who gave us all this groovy stuff and prosperity.
For those who would contest this, they need to point me in the direction of another nation, racial and gender cohort who invented DDT, penicillin and GMO foods in one generation. Ain’t no other group of people on the planet that’s done as much for their fellow man as the American Pale Penis League. DDT alone saved 10’s of millions of lives. American ag researchers in the “Green Revolution” prevented about 2 billion (with a “B”) from starving. But now we in the American Pale Penis League are under attack from every ingrate and wanna-be on the planet. I’m inclined to tell them “OK, just give us oppressive yankee white guys back all our inventions. That’s right - hand over all the radios, drugs, computers, selectively bred crops, pesticides, sanitation, planes, trains, automobiles, you name it. Just give it all back and we’ll leave you all alone forever. Buh-bye!”
But the self-loathing white folks in academia and DC decided that they were going to just give away prosperity. Not share it - give it away, because they thought the American Pale Penis League didn’t deserve it. In so doing, they’ve given away quite a lot of our future.
The other thing that the Boomers (and their parents) did was spend YOUR wealth before you even got here. They created such programs as Social Security, Medicare, etc.
The net:net result is that there’s going to be a political and economic adjustment in this (and other) countries as the Boomers pass from the earth (and not a moment too soon, I should add). You and your age cohort will need to set your expectations:
- you won’t have a retirement at 65. And quite likely, not at 70, either. Before Social Security came along, only the rich “retired.” Other people worked until they dropped. That’s just the way it was. Oh, and BTW - the “retirement” age of 65 came about in Social Security because that was the median life expectancy of men in the mid-30’s. The Social Security system worked because HALF of the people who could have made a claim on the system were dead. That tends to cut down on the outflow of funds rather quickly.
Today, to achieve that same result, we’d need to jack up the age of first benefit claim for men to something like 76. 78 for women. See what I mean about not planning on retiring at 65?
- The Vietnam era Boomers have been vastly over-educated beyond any useful means. Too many of them stayed in colleges as a way of avoiding service (ie, the draft). As a result, the meme of “you NEED to go to college” got started and lots of people your age and younger are now saddled with huge, non-dischargeable student debt. This, IMO, borders on criminal fraud.
I counsel as many young people as I can that:
1. If they’re going for a four-year degree, take the greatest number of general ed courses they can at a community college and transfer the credits in. The costs per credit hour are so much lower at community colleges it isn’t even a hard choice now.
2. For those who want to make money quickly with a minimum of student debt, look at the trades. There’s a shortage of guys in some fields like welding now, machining and CNC machining are about to become a big deal, as well as diesel mechanics, A&P mechanics, you name it. As all these Boomers retire on the Social Security benefits they expect YOU to pay for, there’s a big demographic deficit of people in these positions between the age of, oh, 25 and 50. I’ve been on some job sites recently where I look around and even tho I’m pushing 50, everyone else is older than I am. “Where’s all the young guys?” “Can’t find any.” “WTF?” “Yea, I know, tell me about it.” That’s the conversation in a bunch of shops these days.
3. Don’t become over-specialized. Specialization is for insects. Employers will keep and pay well someone who can do it all. Words to banish from your brain: “That’s not my job.” If the boss tells you that a chicken can pull a plow, just hitch ‘em up. When it doesn’t work, blame the chicken - you did as asked.
- Labor force participation: I’ve got news for you. Up above, when I was saying I study economic and market history? The participation rate growth that happened after the 50’s won’t be seen again anytime soon. Why? We had the world markets to ourselves. We destroyed Japan and Germany in WWII. The UK was putting their heads up their own rectums in labor issues at that point. China and India were still starving third world backwaters. Our economy kept growing, growing, growing... fed by stable currency (gone in ‘73) and cheap oil (also gone in ‘73).
For a few decades, the US enjoyed an economic situation unlike the rest of US or world history. From the 50’s to ‘00, it was a grand run.
Well, now we’re back to the bad old days of the post-war era. And I don’t mean WWII - I mean the Civil War. When you couldn’t depend on the stability of the banking system, the markets were manifestly corrupt, big business had oversized influence on Washington DC, you name it. If you have time, go read up on “The Long Depression” of 1873 onwards. It wasn’t a pretty time, and it factored into everything in the US - from the strife about silver vs. gold as currency, to the Indian Wars, to manufacturing, immigration, etc.
Yep, you’ve been lied to - big time. The most dangerous people are those who still believe the very lies they’re peddling. They fit the classical definition of a sociopath. We have a bunch of sociopaths for political leaders just now... and while that’s sad, it isn’t without precedent in US history. You’re going to have to become very adaptable, quick witted, quick on your feet. Learn skills of self-reliance. A man with skills and tools is always in demand somewhere and he can make his own path in life a whole lot faster than a man without tools or skills.
“1. If they’re going for a four-year degree, take the greatest number of general ed courses they can at a community college and transfer the credits in. The costs per credit hour are so much lower at community colleges it isn’t even a hard choice now.”
I did the reverse. Started with the big university, and transferred down. Positives and negatives. I would not have had as interesting a life from the folks that I did meet at the big university, and I wouldn’t trade my experiences there.
If I were doing it all over, I’d probably have stayed at home and done two years then gone down to the big school. But then I’d not likely be a Christian or a Conservative. That time away from home was huge for me as a person and huge in terms of getting my head squared away. So what to do? How do you put a price on eternal salvation?
Anyways, I’m squared away on the degree, it wasn’t that costly either.
“2. For those who want to make money quickly with a minimum of student debt, look at the trades. There’s a shortage of guys in some fields like welding now, machining and CNC machining are about to become a big deal, as well as diesel mechanics, A&P mechanics, you name it. As all these Boomers retire on the Social Security benefits they expect YOU to pay for, there’s a big demographic deficit of people in these positions between the age of, oh, 25 and 50. I’ve been on some job sites recently where I look around and even tho I’m pushing 50, everyone else is older than I am. “Where’s all the young guys?” “Can’t find any.” “WTF?” “Yea, I know, tell me about it.” That’s the conversation in a bunch of shops these days.”
Yes, this is what I’m hearing as well. Maybe I’ll go back to school again and pick up some certifications along those lines. But I should at least finish my certifications as a teacher and see how far I get along there.
“3. Don’t become over-specialized. Specialization is for insects. Employers will keep and pay well someone who can do it all. Words to banish from your brain: “That’s not my job.” If the boss tells you that a chicken can pull a plow, just hitch ‘em up. When it doesn’t work, blame the chicken - you did as asked.”
That’s been my mantra. Let’s see. I’d have a major in History, minor in Physics if they let me have such a thing. I’ve probably done as many jobs as I have years under my belt. Finally getting into teaching and finding that I really enjoy it, it’s just been a sacrifice in terms of money.
I’m glad someone gets it. You know, it’s funny. My grandparents and I have had some long discussions, they grew up during the great depression. That sense is always there for them, my father was the first to graduate from school. So I guess it’s a blessing to have that experience.
There will always be a place for trades, but it’s easy to go from a degree to a trade than the reverse.
Thanks again for your long reply.
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