Editor’s Note: In this series of articles, we include important or interesting videoclips with our comments. This is an article that expresses our personal opinions about comments made on Television and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerances.
USA becomes a Split Rated Sovereign
S&P downgraded United States to AA+ from AAA on late Friday evening. This was despite an “error” of about $2 trillion in their calculations that was pointed out by the US Treasury. In a sense, this was expected. S&P had warned that they would downgrade unless the debt ceiling deal cut $4 trillion from the fiscal deficit over the next 10 years. When it did not, S&P found itself cornered. Hence the downgrade.
David Beers, S&P Head of Sovereign, International Public Ratings, described their approach as “serious and workmanlike”. Now that the rumor has been transformed into news, what do the markets do?
This decision by S&P might be the reason why Bank of America and Citi traded so horribly on Friday, with BAC closing down almost 8% and C closing down almost 4%. As Sean Egan explained last week (see clip 2 of our Videoclips for July 22 – July 29 article), “all the financial institutions we’ve been trying to recapitalize, over the past 3-4 years, all off a sudden need more capital“.
The Fed has already announced that all risk weights for Treasuries & US Government Securities will remain the same. In other words, nothing has changed. This is as much of a slap as the genteel Fed can deliver to S&P. We concur and we applaud the Fed. As Dan Alpert of Westwood Capital said on Bloomberg late Friday evening “I view this move by S&P as a meaningless gesture” (see clip 2 below).
So what happens on Monday? Nouriel Roubini opined that the fiscal drag on the US economy will only increase as a result of this decision and therefore, paradoxically, Treasuries might actually rise in price (see clip1 below). This was also the view expressed by Rick Santelli of CNBC earlier this week.
Clearly, at least to us, UK & France cannot remain AAA when the USA is only AA+. So do we see a series of downgrades coming down the pike?
None of the guests on Bloomberg TV made the disturbing point Bernard Beal made last week that 7,000 Muni Credits & 15 AAA states will now be on downgrade watch (see clip clip 3 of our Videoclips for July 22 – July 29 article).
Kudos to Bloomberg for being the only financial television network to cover this topic as it happened.
The Attack on European Debt
Last week, Sean Egan declared that “the biggest problem is in Europe“. How timely was that declaration? How we wish ECB, EU officials had read it and returned from their sacrosanct August vacations on Monday! The old adage that if you want to attack Europe, do so in the first week of August was validated in this week’s financial attack in the European Monetary Union.
This week’s crisis demonstrated that Europe is going through its own version of 2008. However, we feel that this week was more European Bear Stearns than a European Lehman. We expect the EU-ECB folks to rustle up funds to buy Italian and Spanish Debt come Monday morning and sort of forever in an QE-Infinity (to quote Dennis Gartman) exercise.
Where will the money come from? Germans are not necessary as long as Americans stand ready. As Vince Reinhart told Larry Kudlow on Friday, the “ECB has an unlimited swap line with the Fed….Give them (the Fed) Euros and you will get Dollars in return and ECB can print as many Euros as they want …“.
The appeal of US Treasuries actually increased during the 2008 financial crisis in America. So the US had never had any problem issuing debt. In contrast, the problem in Europe is First a Sovereign Debt problem and Secondly a bank problem. This crisis in Europe exploded because markets decided they don’t like Italian and Spanish debt at today’s yields. That makes the European financial crisis much more complex and far more intractable than the American financial crisis.
So what is the solution? A real fiscal union in Europe under German control or the end of European Monetary Union? How will the people of various European countries react to either scenario or imposed austerity?
The End Game for Sovereign Debt
This week has conclusively demonstrated that the World is loaded up the vazoo in Sovereign Debt and the markets have begun to say No/Nein/Nyet/Nahi to more debt issuance. What will that do to global growth in the next couple of years? We might want to brush up on synonyms for global recession.
Finally, we reiterate our belief that the global debt crisis will finally end when China discovers it cannot manage its debt bubble. Until that happens, portfolios will need bubble insurance. What is the best bubble insurance? 30-Year Treasuries, as this week proved again. So until the global debt crisis ends in China, we think 30-Year Treasuries should be bought on all serious dips and corrections.
Who said something similar this Thursday evening? Bill Gross of Pimco said “the real potential is in treasuries,….because it depends upon a big recession, but the real potential remains in the 30-year“. Now this is a man who seems to have rediscovered his religion.
Last week, we asked “Will it (S&P 500) maintain its swing trading range or will it break out of that range?” We all saw what happened this week. What happens next week? We don’t have the foggiest except our belief in increased volatility at least into the Fed meeting on Tuesday.
We just hope that Bernanke-Trichet and Obama-Merkel-Sarkozy-Cameron- Berlusconi come up with a believable plan, ideally by Sunday evening.
Almost every videoclip we wished to feature became obsolete or irrelevant due to the significant events of Friday evening and the ECB news of Friday noon. So we feature two clips from Bloomberg’s special report on Friday evening and one from the veteran Ralph Acampora.
- Nouriel Roubini, Christina Romer, Jim Bianco on Bloomberg TV on Friday, August 5
- Dan Alpert on Bloomberg TV on Friday, August 5
- Ralph Acampora & Brian Belsky on CNBC on Friday, August 5
1. Nouriel Roubini, Christina Romer, Jim Bianco with Bloomberg’s Michael McKee and Adam Johnson after the S&P Downgrade (21:45 minute clip) – Friday, August 5
This is too long a clip. So we shall only list the notable quotes:
- Roubini – They (S&P) had downgraded a bunch of European countries and Europeans were bashing the rating agencies – why are you downgrading us? Why aren’t you downgrading the US?…There is no fundamental economic reason at this point compared to a few months ago for a downgrade..right now there is greater risk of a recession, that is the only fundamental difference…
- Roubini – …the paradox is that on Monday, Treasury yields could actually go down rather than up because there might be a massive sell off in the stock market, even greater worries about a double dip recession and when that happens, risk aversion is up and risk is off, people might go even more into Treasuries…
- Roubini – …certainly from a signalling point of view, it is a dramatic event, I think the biggest effect might come on the stock market rather than on the bond market…on a substantial basis in some sense, the ratings do not matter…the market should be looking at the fundamentals and make their assessment…but in an economy that is going towards a recession with falling inflation, zero policy rates, more quantitative easing and more risk being off, Treasury yields from hereon could go much lower rather than going much higher….
- Romer – I agree with the notion that the deficit reduction plan fell way short of what we needed to do both from the growth side and the deficit side…we need some serious help for the economy..and lets get that super committee and lets keep pushing on that…a very serious job creation program..more help for state and local governments…infrastructure..repairing of America’s roads, bridges and airports..
- Bianco – this is the first salvo; they have put on watch …a number of federal agencies including Freddie, Fannie and FHLB, a number of state and local municipalities – all those dominos start to fall, they start losing their ratings as well too, you are going to have a whole legal mess on your hand,….it raises costs, it raises uncertainties, and it potentially raises liabilities…it shouldn’t lead to any forced selling…
- Adam Johnson – Would he (Bianco) take any kind of position in the banks or are they a black hole at this point?
- Bianco – I don’t think it changes the earnings for any specific bank..it is kind of uniform across the board for all banks…that would include foreign banks as well too…so it might bring down the entire financial system a peg, just a peg, but it does not create any type of a 2008 situation…
- Roubini – all financial institutions will become even more cautious, even more de-risking…
2. Dan Alpert, Joseph Brusuelas with Bloomberg’s Tom Keene (05:57 minute clip) – Friday, August 5
Dan Alpert is a managing director with Westwood Capital.
- Alpert – This is a spanking to the Congress of the United States…this is a timeout chair…we have a health care issue and we have a social security issue…those two issues are relatively intractable because of their intense popularity amongst the exactly the same portion of the polity that would like us to reduce our indebtedness and so we have this very, very difficult situation where no one wants to show up on the hill saying I want to kill medicare, I want to kill social security…
- Alpert – Nothing changes on Monday. At the end of the day, the United States of America has the ability to pay its debts…we will. And I view this move by S&P as a meaningless gesture and I am very convinced that the US credit rating will be restored…
- Alpert – We have the ability to do what is necessary to suck in our gut and actually get rid of that debt..
- Brusuelas – This has been priced in by the markets…in the next 24-48 hours we are likely to hear from the President of the United States…Dan, let me ask you, what can the President say that can cause the markets to not sell off…or do we need to hear from Ben Bernanke?
- Alpert – I believe the President needs to step forward and say, you know what, this incident that occurred last weekend, this incident was shameful, beneath us as American people, and we need to get together and do the right thing regardless of idealogies, make sure that this is reversed…
- Alpert – (estimate of GDP this quarter) – I don’t think we are going to see much more than 0.8%-1% going forward…
3. Tracking the Market Impact – Ralph Acampora & Brian Belsky on CNBC Closing Bell (06:37 minute clip) – Friday, August 5
Ralph Acampora is a veteran of technical analysis and Brian Belsky is a strategist at Oppenheimer.
- Bartiromo – Is this October 1978 again?
- Acampora – I think it is. The reason is it came out of the blue, shocking, scaring everybody and lasted about a month and a half. This is not quite a month and a half, shocking, scaring, not necessarily over. The capitulation we’re starting to hear about, not a one day event, Maria, a process. I think we start at that process...... it takes time; everybody holding their breath with Tuesday’s meeting. If he disappoints, I think he could get a little more sell-off. Look at the VIX index and you will see we’re close to something that could be climatic.
- Bartiromo – Brian, what are you saying? you say there isn’t enough fear out there, right?
- Belsky – Right. I echo Ralph’s feelings completely. He could not be more right. We were both on the phone with retail and institutional clients and posed with more buy questions than sell questions.…Everybody seems to want to pick the low. That historically is never a good thing….
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