If the US thought that the downgrading of its credit rating would go unnoticed, think again. First, all the news agencies flocked to the story like vultures to roadkill. Then, the politicians started pointing fingers at one another. Then the President spoke words of reassurance to the American people saying that, in his estimation, America was still triple A.
As stated an an earlier post, the downgrading of US credit had little to do with America's ability to pay its bills. It has everything to do with what has become a dysfunctional government--from whatever party's standpoint you wish to view this mess. No one gets it.
First, let me point to an anomaly. In the wake of a 600+ point drubbing that the Dow took today, there was still a flock to US Treasury Bills. This is because America is still the richest man in the poorhouse. The state of the world economy is so fragile that investors are still willing to bank on the greenback. This will have the twofold effect of holding interest rates down (competition for Treasury bills is based on what interest rate the buyer is willing to accept) and fuelling a demand for US dollars, which will have a negative effect on US exports. The interest stuff is good. A stronger dollar is bad.
Standard and Poor has spoken truth to power. And there is no one listening. Canada went through this in the 1990s. Britain and other European countries are going through it now. It is time for the US to get its fiscal house together in an atmosphere where no one wants to give an inch. The Republicans are being held hostage by the Tea Party candidates who were elected on the promise of no new taxes and substantial cutting of government programs. The Democrats have already given away the farm in agreeing to deep cuts to social safety net programs. The President seems to be stunned in not knowing what to do. The wrangle about the debt ceiling was left largely to Congress with little or no leadership by the President aside from have an interminable number of meetings that seemed to go nowhere. The bully pulpit of the presidency is largely vacant in an atmosphere where opponents do not even call the President, president. They call him Obama. They may as well call him "boy" in the most negative racial sense. No one is going to give President Obama an inch with an election on the horizon. In other words more gridlock.
So why has the market tanked? One would have thought that the downgrading that was constantly touted would have already been priced into the market. What does the market know that we don't know? It knows that US corporations who are holding a trillion dollars offshore are not likely to bring it back into the US without some fundamental tax reform. It knows that there are over 13 million Americans who are unemployed and 48 million Americans who are on food stamps. It knows that whatever fiscal plan is worked out by the elite bipartisan committee won't work without tax increases. While the Dow was off 5.5% the S&P (representing a wider range of companies) was off almost 1 percentage point lower than the Dow. Read for this that the disapproval of the fundamentals is more widespread than the limited representation that the Dow portrays. NASDAQ was lower by over 1.5%. The king has no clothes.
It will be interesting to see how low the Dow is going to go in the next few days before buying or profit taking takes over. Many stocks are now at a rediculously low price/earnings ratio and are ripe for the picking. However, 10 years ago who would have said that General Motors and Chrysler would have needed bankruptcy protection. The uncertainty in the US is palpable. Wall street is a reflection of Main street. This is a solid vote against all of the political parties and the President. And no one seems to be listening.
Bernie
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