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Generational Dynamics Web Log for 6-Aug-2011
6-Aug-11 World View -- S&P downgrades U.S. debt

Web Log - August, 2011

6-Aug-11 World View -- S&P downgrades U.S. debt

Jobs report contains some ugly truths

This morning's key headlines from GenerationalDynamics.com.

Standard & Poor's downgrades U.S. debt from AAA to AA+

Standard & Poor's

Standard & Poor's

The S&P ratings service downgraded U.S. debt from AAA to AA+ late on Friday. The outlook is "negative," meaning that further downgrades are possible.

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics. ... 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."

The Administration put tremendous political pressure this week on S&P, to convince it not to downgrade. However, as I've pointed out before, S&P could not succumb to this political pressure without creating a disastrous situation in Europe, where S&P had resisted political pressure not to downgrade various European countries.

There are many contracts in the world that are written to require investments only in AAA rated securities. Many mutual funds are required to invest only in AAA rated securities. Thus, the downgrading of US Treasuries presents a very complex situation with unforeseeable consequences.

The other two major ratings agencies, Moody's and Fitch, have reaffirmed their AAA ratings on U.S. debt, but still have a "negative" outlook, meaning that they can join S&P in its downgrade. However, for the time being at least, the fact that only one ratings agency out of three has lowered the U.S. rating may make it possible for many organizations to ignore the S&P downgrade, or to issue a waiver of some kind.

The first major market test of the downgrade will occur on Sunday evening ET, when the Asian markets open on Monday morning. Bloomberg and CNN

S&P downgrade tops a chaotic day on the markets

Wall Street stocks ended the day mixed, obscuring the 508-point range through with the DJIA traveled, in a roller-coaster ride that appeared to contain both upward and downward mini-panics. The jobs report for July came out at 8:30 am ET. It was extremely dismal, but it was less dismal than expected, and this triggered a huge initial market spike at the open. But then, each tiny bit of bad financial news caused the market to go down, and each tiny bit of good financial news pushed it back up. AP

I would warn my readers that the market is extremely dangerous right now, and that cash and Treasury bills are much safer than the stock market right now, despite the downgrade.

Jobs report contains some ugly truths

The Friday morning jobs report said that the economy added 117,000 jobs in July, and the unemployment rate fell to 9.1% from 9.2%. But according to the jobs report, there were 38,000 FEWER people working in July versus June. The anomaly was caused by a huge spike-up in the number of "discouraged workers," people who have stopped looking for work, and who are not counted as unemployed. And the so-called "real" unemployment rate, which adds in discouraged workers and others not counted as part of the headline unemployment rate, remains high at 16.1%. CNBC

Pouring water into a bucket with a hole in it

The chaos is much worse in Europe than on Wall Street. The European Central Bank is reacting by restarting its version of quantitative easing -- by purchasing bonds issued by Greece, Portugal and Ireland. But the ECB is not yet purchasing bonds issued by Spain and Italy, because these countries have not yet taken enough austerity measures. According to Luc Coene, on the ECB governing council:

"The bank is ready to make major efforts to help the situation, but countries have to do what is necessary first, otherwise it’s just like pouring water into a bucket with a hole in it. Markets have heard too many promises, without seeing anything concrete … once concrete measures are taken, contagion will stop automatically."

MarketWatch

Turkey will not participate in US-Israel military drills

The Turkish navy will not participate in upcoming joint drills staged by the United States and Israel in the Mediterranean, in a display of its disappointment with Israel after the country refused to apologize for the deaths of nine Turks in the confrontation between the Gaza "Freedom Flotilla" and the Israeli navy in May, 2010. The purpose of the drills, which have been going on for ten years, is to gain experience in collaborative research and rescue missions. Zaman (Ankara)

Lebanon and Israel disagree over offshore natural gas and oil rights

Lebanon's parliament has passed a law that, in effect, challenges Israel's rights to continue drilling for oil and natural gas in areas of the Mediterranean Sea that Lebanon claims are its own. Lebanon will submit the law to the United Nations, to determine the maritime boundary between the two countries and to define Lebanon's "exclusive economic zone" (EEZ). The National (UAE)

(Comments: For reader comments, questions and discussion, see the 6-Aug-11 News -- U.S. State Dept. urges U.S. citizens to leave Syria immediately thread of the Generational Dynamics forum. Comments may be posted anonymously.) (6-Aug-2011) Permanent Link
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Generational Dynamics Web Log for 6-Aug-2011 6-Aug-11 World View -- S&P downgrades U.S. debt

Standard & Poor's downgrades U.S. debt from AAA to AA+

S&P downgrade tops a chaotic day on the markets

Jobs report contains some ugly truths

Pouring water into a bucket with a hole in it

Turkey will not participate in US-Israel military drills

Lebanon and Israel disagree over offshore natural gas and oil rights

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Generational Dynamics Web Log for 6-Aug-2011
6-Aug-11 World View -- S&P downgrades U.S. debt