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Monday morning throughout the world was met with markets declining in response to the Standard and Poor’s downgrade of U.S. government debt. Yes, we stand corrected. After putting out the MKG Blog last week stating that the U.S. debt rating hadn’t been downgraded—it suddenly was. With the markets closed and everyone pretty much gone home for the weekend—except in the S&P offices—Standard and Poor’s made their unprecedented decision and announced that it was downgrading United States debt from AAA to AA+. Very smart on their part—to wait until nobody was looking. Of course, it made for a very long weekend for many and it gave the media mavens something to write about over the last two days in great anticipation for Monday morning.
So there are two thoughts that come out of all of this. Three, if you consider that both Moody’s and Fitch’s made decisions not to downgrade their U.S. debt ratings. This, I’m sure, will be called into question at some point in time and we’re surprised the media hasn’t really picked up the ball and ran with this one yet. However, for many of us watching the fallout from the Administration as it spent the weekend criticizing Standard and Poor’s for the downgrade, we have to ask, “now that it happened, does the Administration really think it was uncalled for given the financial state of the U.S. economy and what we went through to not accomplish what everyone knows the government should have done?” Standard and Poor’s more than just suggested that they wanted to see a $4.0 trillion cut in the budget deficit over the next ten years; it would have been worthy of the government to at least come close to that figure to avoid the consequences of a downgrade.
This gives the global stock markets reason enough to sell off as investors become nervous over what this all means. Actually, perhaps it doesn’t. Nothing has really changed and even without the S&P rating downgrade. I’m pretty sure that most of us, meaning the world at large, know that the U.S. is in financial straits; the country has been through an embarrassing time with its failed budget debate, and has failed to put forth an agenda package for stimulating growth in the economy. Given all of that, we have a conundrum before us. If the world is feeling a sense of instability and investors are in a hurry to sell off stocks, then why even after S&P downgrades U.S. debt to AA+ are debt prices rising and bond yields falling as money seeks out the U.S. as a safe haven—literally from the short-term two year treasury notes to the long-term 30 year bonds, prices in U.S government debt are rising and yields are dropping? Investors should take note.
While not necessarily comforting, one silver lining may be that this latest wake-up call elicits productive Congressional action that is in the best interests of this country, not action based on special interests. That action must include making the hard decisions needed to right the financial “ship” in the United States. Meanwhile, China has sharply criticized the United States. Indeed the relationship between the United States and China on both an economic and a financial level is significant and important to the smooth functioning of the global economy. The European Central Bank (ECB) has stepped in to support the debt markets in Spain and Italy by buying paper so that interest rates will remain lower than they otherwise would be. This is important as world turbulence in weakening financial markets creates enormous psychological and economic risks due to imbalances. The economic, social, and political fabric of the global community needs a large dose of stability and dependability. Without stability, the many moving parts are more inclined to be vulnerable to disruptive forces. Leaders must lead now, and lead with humble wisdom.
~Mark Gaskill, Chief Investment Officer
~Julie Bryan CFA, Director of Research
