Downgrade fears as Moody's may follow Standard & Poor's

As explained below, Egan-Jones was the first agency to downgrade the US credit rating. A few days later Standard & Poors followed and downgraded the credit rating to AA+, with a negative watch (1/3 probability of further downgrade.) That additional downgrade may follow if there are no fiscal improvement. According to downgrade fears hunt world markets on august 8. 2011.

Moody's this morning restated the possibility it could join Standard & Poor's in lowering its rating of U.S. debt. The S&P decision has already sparked concern and market reaction around the world.
Paradoxically as it may sound to a layman, the demand for US bonds (debt) has not declined because
  • The alternative government bonds are no better. US government bonds are still relatively safe.
  • Because the risk of a double dip in the stock market has increased and then bonds are regarded as a better investment objects than stocks.
  • Decreased global interest level during a double dip that is reflected in increased bond prices
So what are the problems for the US economy? First and foremost the inability to grow and create jobs and the fiscal situation with a growing debt and fiscal deficits. In addition policy makers don't have the instruments to deal with the first issues. So the USA has to get its fiscal house in order before Standard & Poors put USA credit rating on a positive watch and finally return to a AAA credit rating.

One heading on Cnn august 8 2011 before the markets open is also "Downgrading the downgrade".

Geithner continued the Treasury's criticism of S&P, saying the ratings firm "has shown really terrible judgment and they've handled themselves very poorly. And they've shown a stunning lack of knowledge about basic U.S. fiscal math." The Treasury says S&P made a $2 trillion math error in downgrading the U.S. rating on Aug. 5.
Standard & Poors track record has been terrible according to the well known economist Lawrence Summers. But that is not the main issue he says, hinting at the problems the political polarization creates for timely and transparent decisions.

Moody's said it expects the economy will improve and additional measures to reduce the budget deficit will be in place by 2013. The rating agency said this is why it reiterated its AAA rating for U.S. debt on Aug. 2, when the Senate agreed on a 10-year plan to reduce the deficit by more than $2 trillion.

But Moody's said that its negative outlook, which it also assigned on Aug. 2, was due to political squabbling in Washington -- the biggest potential threat to the bond rating.

Source: Moody's: Why We're Not Downgrading US Yet

Egan-Jones downgrades U.S. credit rating

Egan-Jones downgrades U.S. rating to AA+ from AAA because of rising debt-to-GDP ratio. The reason is not the delay in raising the debt ceiling.

-Small ratings agency unlikely to have market-moving implications, but comes amid possible downgrades from larger ratings agencies.
The home page of Egan-Jones where you can find their methodology etc.

See also:
U.S. AAA Credit Rating Downgraded By Egan-Jones Moodys and S&P Warn They May Follow

David Stockman: Republicans have abandoned their principles.

The populist tea party have entered the American House of Representatives. Now a famous republican David Stockman, a former director of the Office of Management and Budget under President Ronald Reagan cools their hot tea. During the last half year from the summer of 2010 to the end of the year he has warned against both the repuplican and the democrates fiscal policy:

IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nations public debt if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 will soon reach $18 trillion. Thats a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nations wealthiest taxpayers be spared even a three-percentage-point rate increase.
Source: New York Times July 31, 2010 "Four Deformations of the Apocalypse".

Other Articles about David Stockman

In a nutshall his message is:
  • 40 years of profligate accumulation of public and private debt,
  • that continues to grow at a rate twice the growth rate of the economy
  • reckless money-printing by the Fed
  • led to an economic crash landing, which left the USA with an enduring structural breakdown, not just a cyclical downturn.
  • Debt-fueled easy money bubble.
  • The USA is drifting towards monetary conflagration.
  • Congress should allow the Bush tax cuts to expire for everyone.
  • The only solution is a long period of debt deflation, downsizing and economic rehabilitation, including a sustained downshift in consumption and corresponding rise in national savings.

Financial time series are asymmetric

It is well known that financial time series are asymmetric. In plain English that means that downturns are more dramatic than upturns. Compare downturns to mountains in Himalaya and upturns to Norwegian mountains and you understand what we mean. Even if there is not much information on this site at present, your visit to the site can be profitable, eg. if you download our Excel spreadsheet. This spreadsheet with Norwegian text should be easy to understand and modify. In that spreadsheet we have computed a lot of indicators that are used by traders. Among them you find our proprietary percentilebands. So download the spreadsheet here:

This file is made for educational purposes, so we take no responsibility if you use them in your financial transactions, trading, investment etc.

Distinction between investment and speculation

If you invest in a company for dividends, in a sense you buy a part / share of the company. You become an owner of the company and those employed in the company work for you. You invested to get a positive rate on your investment (ROI). Investing in a company that pays dividends is a way to make money in a flat market or a stock that is moving sideways between a floor and a roof.

If you invest in a company because you think the company is undervalued and you assume that the price of its shares will increase, you bet on a price increase. Traders typically do this. Unless they trade exotic products or short the stock, their aim is to buy cheap and sell expensive. By this definition trading is speculation. In other words, you calculate your odds and trade if the odds are on your side. Odds are probabilities.

If you think finance is an exact science like the natural sciences, you should think again. As a trader money management, calculating your risk / reward and a trading system is important. Bandtrading is a technique to make money in a flat, falling and increasing market (where you can replace market with a stock).