The downgrade is a serious warning that worse things are around the corner and will add pressure on lawmakers to do more to reduce the deficit along with fixing many other economic problems... Regardless what they do, it will most likely stall economic growth for many years. What does it mean to the average joe? Just use google and you'll see many sources about what it means to you and I. http://www.google.com/#hl=en&source=hp&q=What+does+the+downgrade+mean+to+consumers Mark
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I try not to get overly political. I really hope, though, that both parties come to realize how serious this situation truly is. There should be no sacred cows anywhere. They SHOULD be talking about combining significant downsizing of entitlement programs with raising significant taxes.
Long story short is the equities market is about profits and psychology. USD strength is about relative value to commodities and other currencies. Unless interest rates go up, or the gov't raises taxes and cuts spending the dollar will continue its slide. A couple of interesting factors though is that given the state of affairs globally and in particular Europe there are few bastions of safety and that is one factor that has continued to support the USD. As turmoil hits foreign sovereignties pour cash into our Treasury!?! The politicos know they're a bit screwed (those that are behind the curtain and actually understand economics) in so far as QE has gone through its ability to gain much traction anymore---more priming will not likely do as much. Curves show the decreasing ability of 1 trillion in QE's effect to stimulate the economy but do produce inflated bubbles as liquidity looks for a roost. Likely intermediate term and over the next decade we go down and sideways in the equities markets. But as always the markets are forward looking which means we may go up first as Washington grapples wiith the petard thrown by their brothers from S & P. Honestly it's a gift because DC is the enemy of business. Business always does best when you have gridlock in Washington but now a warning shot has been fired. The worst thing that can happen is for the Politicos to go off the deep end. They will do the wrong thing for the economy. The good news as described by S & P is they can't do anything---gridlock. Some things are for sure----Volatility in the market will persist. Volatility has a memory and we are feeling the ripples from 2008 where vix hit 100 (more or less) VIX of 100 means options market makers have priced in a 100% price swing in equities for the 500 largest US companies over a 12 month period. We hit 40 in the markets yesterday. If Vix continues to expand and it very well may then that means our price swings in all instruments will be wide. BUY and Hold is dead. Nimbleness is important. Given the markets are largely psychologic and profit driven anything can happen especially since corporate profits have been expanding. One big strike against any real upside with New Highs is that psychologically many people are "Too scary for me" I'm buying X (insert instrument of choice sans the stock market which is now viewed as a rigged casino). Human nature is do the wrong thing around extremes in price--hence the classic puke, or buying the top. If we started another ramp up it could gain momentum as everyone at some point of the price increase will be saying oops missed another rally I need to get in as they watch everything crumble around them. That's volatility in a nutshell. Listening to individuals with credibility illustrates the conundrum. That is to say we are walking on eggshells. If we do lapse into another recession (we are on the brink now) then the mass psychology is so bad that the driver for this economy which is 70% consumer related dries up and you have a self-fulfilling prphecy. That is one reason DC is spinning the S & P downgrade as overblown. They are trying to not spook the herd. Obama and his team of financial wizards are cooking this weekend I can assure you. What's in the stew---? Their menu has been the same forever. Maybe this time it will be cooked goose? If that's the case then yeah hit the panic button. Takeaway: Scary stuff to average Joe. Even Dr. Econophysicist, phD is a bit perplexed. Sometimes ignorance is bliss. What kinda irks me is when on the news you hear these politicos who flunked high school math telling us we need to do X.......
Oh I forgot to answer the question----Interest rates will go up 1/2% but not immediately. The 1/2% increase will go to keep the bond sales flowing. Anymore and they'll kill the "recovery."
Finally US financial officialdom has cottoned on to the fact that the West is in terminal decline. 3 dud Presidents in a row have just about stuffed America. Socialism + Merkell has put Europe into freefall disaster. They keep feeding the senile western economies with QE viagra - hoping for a miracle Oil producers and China are buying up commodities and intellectual assets as fast as they can. It doesn't look good folks.
the long bond market doesn't need an S&P downgrade to raise interest rates on long treasuries or any type of treasuries. the bond market controls interest rates with or without a change of ratings. Could be the bond market reacts negatively as a result of the downgrade and the price of long treasuries fall and interest rates rise? Yes. But the market sets bond prices and yields, by supply and demand in the market and especially by the major players like China and Japan.
I agree and understand. As a disclaimer I believe a 1/2% increase is prognostication only. As far as Asia owning the West I gotta say I doubt it. Culturally there are reasons for Western Civilization prospering over the long haul---the book "Carnage and Culture" by Victor Davis Hansen is a good read into the insights of cultural succession. But yeah there is a fair amount to worry about these days.