The G-7 pedaled hard overnight to avert a complete collapse in global investor confidence. Their actions followed the S&P’s U.S. sovereign-rating downgrade and they came in the wake of a major sell-off in Italian and Spanish debt instruments. The two watershed events have now collectively augmented the risks of a serious setback to the emergent global economic recovery. In last week’s CFTC market positions tally, there had already been a noticeable pullback from bullish commodity bets by speculators who fear a global slowdown as being underway. Current odds of a US dipping into another recession are hovering near the 40% level.
The G-7’s officials have emphatically stated that they will take “all necessary measures to support financial stability and growth.” Member nations and their central bankers “will inject liquidity and act against disorderly currency moves as needed.” Speculators can try to call their bluff; we doubt that they will succeed in their efforts; there is way too much at stake in this poker game, you know. The EBC also indicated that it will actively buy Italian and Spanish bonds while Japan signaled that it is willing to make further US dollar purchases in a sign of concern that prices are becoming unhooked from fundamentals. This is war, and wars invariably come with casualties. S&P against the G-7? “Bring it on,” says the G-7.
Senior S&P management did not try to even slightly defend the fact that their firm made a $2 trillion dollar (!!!) mistake when it downgraded the US’ credit rating. Senior S&P management actually chose to focus on the fact that it was within its “boundaries” of activity to effectively downgrade the US political circus (or “process” as it called it) and actually labeled the US government’s performance as not deserving the AAA rating. Gene Sperling, the Director of the White House’s National Economic Council, called the [S&P] “difference,” totaling over $2 trillion, “breathtaking” and said that “the amateurism it displayed” suggested “an institution starting with a conclusion and shaping any arguments to fit it.”
What does the S&P downgrade really mean? Possibly that the USA now joins a list of credit “deadbeats” that includes countries such as…New Zealand and Belgium? It remains ahead of: China (!), and Japan (!!) despite the considerable weight that those two currently pull on the global economic scene. The fact that S&P is being taken seriously about this downgrade is actually mystifying; this is the same agency that, during the height of the financial crisis, assigned AAA ratings to “any pile of junk that was tall enough to reach the doorbell and ask,” [according to Rachel Maddow on Sunday’s “Meet The Press”].
Why should you (not) care about what S&P says? Well, at the time when they were being relied upon to be an effective “credit cop,” all of these agencies, including “S&P, Moody's and Fitch underestimated how far housing prices would fall, and many securities got top ratings but later proved to be toxic. Following the mess, Congress moved to limit the rating firms' importance by encouraging new competition and pushing to reduce instances in which rules cite a need to use bond ratings.”
Former Bush (!) speechwriter David Frum has now suggested that the entire American conservative movement has “fundamentally misunderstood” how to manage the economy, in a manner equally blind to reality as the left was when it came to the threat of Communism decades ago. The American right continues to clamor for tax cut extensions and for additional cuts. This at a time when the US federal tax burden is at a six-decade low. The same faction continues to demand the continuation of a deregulated financial sector. This despite the excesses that such lack of supervision has brought about – many of the after-effects of those orgies are actually being battled against as we speak.
…and the Fed meets tomorrow. Can’t wait for the gravitas on display at that gathering. But, at the end of the day, as one investment manager remarked, the Fed can do little about what the political “process” (and the S&P thereafter) has wrought: “You cannot hire a carpenter to fix a plumbing problem.”
Let the battle rage on. Just be on alert (as in any battle) for “collateral damage.” When America sneezes…
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America