Why did S&P (Standard & Poors ) downgrade US Rating from AAA to AA+ – Now what ?

Why did the S&P (Standard & Poors ) downgrade US Rating from AAA to AA+ and what will happen from here?

 

You can read the actual US downgrade here -was done by Nikola G Swann from the Toronto Office  http://sg22.ly/p8ZJPm

 More broadly, the downgrade reflects our view that the effectiveness,
stability, and predictability of American policymaking and political
institutions have weakened at a time of ongoing fiscal and economic
challenges to a degree more than we envisioned when we assigned a
negative outlook to the rating on April 18, 2011
Our revised downside scenario--which, other things being equal, we view
as being consistent with a possible further downgrade to a 'AA' long-term
rating--features less-favorable macroeconomic assumptions, as outlined below
and also assumes that the second round of spending cuts (at least $1.2
trillion) that the act calls for does not occur. This scenario also assumes
somewhat higher nominal interest rates for U.S. Treasuries. We still believe
that the role of the U.S. dollar as the key reserve currency confers a
government funding advantage, one that could change only slowly over time, and
that Fed policy might lean toward continued loose monetary policy at a time of
fiscal tightening. Nonetheless, it is possible that interest rates could rise
if investors re-price relative risks. As a result, our alternate scenario
factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to
the base and upside cases from 2013 onwards. In this scenario, we project the
net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and
to 101% by 2021.


It was argued by the US Treasury Department that there was a $2 Trillion error that was missed in the analysis.

Even if that is the case, the underlying problems still exist – Let’s just hope the S&P  company never needs a bail out since I’m sure they are not in the Governments good books right now.

 

So what will happen from here ? & as Traders what should we look for

What does the S&P – U.S. Downgrade do?

1) Sends a clear wake up call to Washington

2) We could expect higher interest rates

3) Some are predicting Armageddon

4) Some are saying its no big deal

Who will this US downgrade affect ?

Individuals , Business, & Government ( so basically everyone)  check graph below of who holds that US $14+Trillion  Debt and what percentage.  Anyone on that list will be affected in one way or another. ( I’ll try to have a future blog where we can break it down in more detail)

 

 

 

 

 

 

 

 

 

 

 

 

 

Here’s a few examples of how this US Downgrade will affect that list

1)Interest Rates move up which causes borrowing costs to move up and that will affect anyone with a line of credit, loan or mortgage (both businesses & individuals) .

2) Stock Prices should move down — Some experts say Dow could drop another 1,100 points from here — Note: Canada lost its AAA rating in the 1990’s but stocks moved up 15% the following year of the downgrade)

3) Since has never happened to a superpower like the US to lose the AAA rating what will actually happen will initially be based on the fear and uncertainty

4) German Bonds could go up as investors look for safer balance sheets

5) China won’t be happy -read a story this morning that said “China Tells US ‘good old days’ of borrowing are over”

6) Banks –

many other things will be affected & we’ll see this being debated and discussed in Washington & in the news —

 

We’ll see Sunday Night what futures will do but should be a very interesting week ahead …. Tune in

I will be running live Futures charts Sunday night so check http://twitter.com/stockguy22 or this blog for the link to access the live feed

 

Stockguy22

 

 

 

Posted in Commentary