S&P downgrades US credit rating from AAA - Yahoo! News
Note: Making political comments may get you banned (not post deleted-- your *ss may actually get banned off this site if enough people complain)
For those who are new here, when something really big happens, we discuss how we can make money off of the change. We don't harp or make political banter or rants-- that's for other sites.
There will be hours (and hours, and hours) of political and economic oriented media coverage on this for the foreseeable future.
But on the Fastlane forums, we do something different.
We figure out how to profit from it.
How could you or your business potentially profit or prosper from a downgrade to US credit from AAA to AA?
Do read the article (link above). I find it fascinating that when a number of countries had their ratings reduced from AAA to AA, the long term effects actually trended up for them. How to explain that?
I think the American people were really hoping that this debt ceiling deal was somehow going to be their saving grace. The real issue is that the government has a long term debt problem that will not be fixed anytime soon.
Perhaps now, profit and prosperity will come from the thought, "It's all up to me now."
Perhaps now is the time to teach, show, and sell opportunities (ideas) more than ever. To the business owner, does it now make sense to say, "Don't wait on the gov't to fix your issue?"
To be honest, i was waiting for this, and it actually came late.
I think were looking at a global reccesion which is realy just a part of the economy. And i think theres much to gain in going into business that doesnt cover superficial needs. So going into food business, or cheap clothing may be a thing to try out. If you got the capital that is.( i realy dont know, but thats just what common sense tell me)
had to make an edit here. Im not saying WE ARE GOING INTO a recession. Us is not the only problem. EU has big problems too. So having knowledge of how to make money in a reccision is crucial for succses. I wonder what businesses prospered under the 1924 recession. Better to be prepared than not
Thanks for starting this thread, Russ.
My business will be directly impacted by changing US Treasury rates...we recently finished construction on a new office, which is partially financed with an SBA 504 loan. The way that works, you don't know your final interest rate until the loan is packaged and sold as a treasury debenture...so obviously I'm watching treasury movement with great interest! We have only a small amount of control over when our loan gets sold...by working closely with the SBA we can expedite (to a small federal bureaucratic degree) or drag our heels to wait out short term swings.
It's a smaller part of our overall building financing, and will be a fixed rate for 20 years...so the impact is not likely to be huge, but I'm hoping for rates to stay or go lower for the short term.
The interest rates are going exactly where they need to be during this time of uncertanty UP!! The artifically low interest rates couldnt last forever.
I guess now its just an argumnt about if (political comments deleted)-- watch it, Kak. You have been warned- Russ H.
The increase in the "risk free" rate of return will drive up the interest rates on my investments "finance 101" everything is just an underwriting of the risk associated with the aditional percent returns over that of the US government bonds.
Does anyone know if it will change the banking rules as some corperations now have a higher rating than the gov.
Amazing that they took so long to downgrade US treasuries. I think everyone was already pessimistic about the debt issue.
"An entrepreneur must have passion for an idea and the stupidity to believe that it will work. ""
This isn't news, this should already be priced into stocks. This is probably what the most recent decline has been all about. Thinking there is even a possibility that you won't see a stock decline on Monday, but instead you'll see traders buying on this news after a couple weeks of selling the rumor.
With regards to interest rates, there's no reason to believe they're going anywhere. When the rest of the world's bonds look as ugly as they do, the money is still going to pour into the US's AA+ rated treasuries. They aren't going to have to raise rates to make it happen. This was clear last week when treasury bonds went to almost zero % return several times because investors went there for safety, still seeing the US as one of the safest places to put their money with a tanking market.
Shop 'til you drop - DEAD! -- http://www.GrampsGifts.com
I think one of the most probably impact of doing business from the decline of the American economy and trust worthiness, is the ever increasing needs of credit lines... until now unless we are dealing with massive amount of money changing hands, no small business ever find the big need for LOC... imagine if you are making widgets that is mfg in China... and you have to pay first before they are even manufactured or at least put security deposit in place. This will hurt a lot if you dont see it coming.
Some great points so far-- thanks to all.
And it turns out S&P made a TWO TRILLION DOLLAR MISCALCULATION when determining the US's credit rating (it was called out after they issued their press release):
And S&P acknowledged the mistake, and STILL maintained the downgrade, saying the downgrade was due less to $$$ and more to acrimonious politics.The U.S. Treasury said the rating agency's debt calculations were wrong by some 2 trillion dollars. S&P has confirmed it changed its economic assumptions after discussion with the Treasury Department but said that did not affect its decision to downgrade.
A major theme in S&P's analysis was the apparent breakdown in the ability of both sides of congress and the White House to govern effectively, as evidenced in the fractious negotiations leading to a last-minute debt limit deal that brought the United States to the edge of default.
Is S&P a credit rating agency, or a political watchdog group?
Sorry-- breaking my own rule here-- please don't answer if you think this is politics driven (ie, one side or the other), please don't make any comments. Just answer by saying "politics", and no more.
A better response: If you have knowledge/insight of how S&P is using this to lever politics and/or world markets, please share. But be very, very careful-- don't make comments or assessments of one political side or the other-- just say what S&P is doing to try and influence the world (or US) economy by doing this.
MJ/Other Mods-- if I'm getting too into the political muck here, close the thread. I didn't intend to, but the S&P comment about the downgrade being based on politics and not $$$ really has me confused.
BTW, if you haven't ever really read up on the Great Depression, it might be worth spending 15 minutes reading the wiki:
Great Depression - Wikipedia, the free encyclopedia
One of the biggest impacts this (long overdue) ratings change will have on the US is the cost of our debt. We've been running a deficit for a long time, and it's exploded in the last few years. We have to borrow to cover that debt, just like anybody buying a house and getting a mortgage. A country's credit rating has a large effect on the interest rates it has to pay on its debt. A lower credit rating means we'll be spending a lot more money on interest in the future -- we'll be rolling over the bulk of our debt within about 4 years, and the new debt will be at the higher rates. So an even higher percentage of our GDP will go to totally non-productive interest payments. Consider how that will affect the business climate and your ventures.
I subscribe to Peter Schiff's videos. He's been right all along on these things, so I think he is one of the most trustworthy sources of understanding.
Personally on Friday, I bought puts on the S&P and have been holding Calls on the TBT (a bet that interest rates will rise).
Besides that I'll play short term trends as they develop. It is tough to say how the market will react. Short term, I would have said sharply lower on Monday, but after such weakness for the past 2 weeks, it wouldn't surprise me if the market went sideways for a few days to digest things.
Longer term though, I think this downgrade is like the first roll of the bolder over the cliff for the US dollar. It will only pick up momentum from here as buyers of US debt demand more interest, the increase in interest raises the national debt and it spirals in a bad direction.
Since my assets are held in Canadian dollars I'm no too threatened by this, but my eBiz operates 99% in the US, so a major downturn will impact my income in a big way.
That is one of the reasons I've spend the past year learning to trade the markets. It's a skill that doesn't diminish with economic trends (or old age for that matter).
Overall I think the first thought should be to protect your assets. I think a lot of Americans are naive and complacent about the way the value of their currency is being (rapidly) eroded.
The entire world has been complicit in sustaining the illusion of the strength of the US dollar, but this downgrade has signaled the beginning of the end of cheap debt, which has been other only thing enabling the US gov. to continue to deny dealing with it's problems in a meaningful way.
I owned SPY 126 puts and sold them on Friday at a large gain (or course it didnt offset all of the portfolio loss...). The S&P downgrade was well known to happen and certainly priced into the market over the past week.
Actually, there were early leaks on Friday that was the primary cause of the sell off during the day.
S&P has been notoriously late on downgrades, so this was WAY overdue. The market knew about it.
In my view we could still see more pain in the markets this week from mutual fund redemption. Retail investors are always late to the party and they could sell off causing mutual funds to tank. Considering the huge amount of equities in IRA/401k's, this could cause problems this week.
Other things to consider are the flow of money. Money is like water, it follows the path of least resistance. Big money will need to find a home. With treasuries downgraded, we will likely see money flow from this market.
But where will it go? Stocks, corporate bonds, sovereign debt, real estate, commodities? Who knows. But with the S&P500 technically ready for a correction to the upside, I wouldn't want to be short at open tomorrow am.
Bobby, you've hit on the most interesting thing about the current situation. It is obviously a time for money to flow to safety, but there isn't any safe place for it to flow to.
Japan and Switzerland are the only real candidates and both governments are vowing to fight any appreciation in their currencies.
Many, many thanks for the insights and updates.
This is EXACTLY what I was hoping for-- info on how/why this is happening.
As someone who has never been good at forecasting the markets, I very much appreciate the opinions from you all.
PS And another big thanks to anyone who read this thread, and wisely did NOT post, b/c they didn't have the expertise. Your discretion is very much appreciated.
Really, really excellent video, Jon.
Schiff specifically responds to and addresses the questions I posted earlier (e.g, is S&P a credit rating agency or a political watchdog)-- great answers by Schiff.
He also really explains the "why" of things--- and acknowledges that S&P and Moodys and others rated derivatives as AAA, and explains how the other credit ratings agencies "chickened out". Also, his views on flight to quality going to the Euro, since Italy has actually made some hard austerity choices/moves, is significant.
I just want to make money. Knowing the hows and whys of a market drop has never helped me make any money. But that's just me. I focus on the business. I want to know the income statement and balance sheet. The market and causes of drops are irrelevant to me.
From my perspective, ANYTHING that can drop the entire market is good. I don't care if it's a down grade, mortgage backed securities implosion, riots in Greece, tech sector fallout, collapse of housing, whatever. All I am looking for is a system wide collapse.
It's the absolutely easiest way to make money.
In a 'normal' or bull market economy, it is extremely difficult to make money. Prices are too high. And when prices are NOT too high, it's usually because the business that I'm looking at is going through a problem. And problems are difficult to diagnose as terminal or turnaround. Very difficult.
A market wide crash is easy. I can have a spectacularly performing business that will simply collapse in sympathy with a meltdown! How easy is that? I already know that the business is healthy AND I get to pick it up on the cheap! This is exactly what I have done in years past when the market fallout was attributed to the 'credit crisis', or 'tech wreck', etc.
We should all hope that this down grade causes another market meltdown. Why work for money when the market can give it to you for free?
Disclosure. I haven't bought a stock in over 2 and a half years as prices have racheted higher. I'm praying that the market gives me some freebies.
firstly, the recent downgrade was probably medicine well needed. I am not sure if the politicians fully understand what a downgrade even means but lucky for those idiots the interest rates will most likely stabilize at the current levels (flight to treasuries have been UNREAL - bond auctions are flying these days) so the rates will stay low. quite frankly, its easy for Bernanke to announce a low rate policy for a couple of more years. Japan was downgraded this past January and their rates have still remained extremely low
secondly, the flight to safe haven treasuries has never been so crowded. Anyone see 3 month or 6 month rates? they've been negative! Tonight's print: .01% . Point Zero One Percent. Seriously? People are scared shit of risk right now. Going short treasuries only makes sense if there's a chance the economy is gaining traction.... but much of the data I see shows a very bleak macro outlook
thirdly, we've all seen the impacts on the banking sector in the stock market. Banks are so out of favor right now and may have just a bit more to drop. The US gov't has made it very obvoius they will not let banking solve their own problems and will intervene. Not saying to buy anything specific, but read history and see what someone said about 'blood in the streets...'
fourthly, gov't sponsored entities - Freddie and Fannie - they have a better return than treasuries and come with a 'virtual' USA guarantee as well as real cash flow from the mortgage markets. Carry trades involving GSE bonds make a lot of sense. Indirect ways to do this is buying AmReits such as AGNC, NLY, ANH etc
lastly, hard assets. If the current government continues to print money like its going out of style then there will be people scrambling for alternative currencies and income sources. Anything paying income during inflationary periods will become "gold"
Unfortunately Russ, this is a subject that cannot be ultimately discussed without the political interference in the markets. All markets are heavily influenced by our political leaders: stocks, bonds, real estate, metals, etc ...
I have been long silver LEAPS and in past few days rebought many holdings I once held in the form of LEAPS including Ford, Apple and VNR. I bought AGNC and NLY yesterday and sold half of those positions already. ALso keeping SDRL in my sights but waiting on European fall out to drop it back to 20 something. Still 70% cash in liquid accounts. I have also been very aggressive buying low-medium end real estate single family homes making 20% returns cash on cash. My goal is to get another 6 units by years' end. Bank stocks are on my watch list as well .
Good Luck to all to not only following your convictions, but sticking with them.
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