April 19. S&P downgrades US outlook on debt concerns
Here’s an explanation for the S&P downgrade of the US outlook: It comes time to review the US, but S&P is short on analysts because the smart ones (anxious to avoid the possibility of incarceration) have flown the coop after the subprime debacle. Being short staff, SVP Smith hands the job to VP Johnson, who in turn gives the US assignment to Bob, the new trainee, chuckling as he thinks, “How hard can it be? It’s the United States– gold plated. I’ll just give him last year’s report to use as a template and rubberstamp the glowing reveiw.” Unexpectedly, Bob does what any new fresh-faced college kid does and goes to the internet…sees deficit spending of 10% GDP, debt of 100% GDP and sees a Huffington Post article that 45% of the populace pays no taxes and the top 400 tax returns paid less than 10% of their income in taxes. And Bob concludes, “Holy crap, this is UNSUSTAINABLE, and I HAVE DISCOVERED IT. It might look gold plated, but it’s tungsten underneath.” Johnson, from force of habit, gives the report his seal of approval without reading it. Of course, it’s only funny until someone loses a few billion $ market cap in stock valuation.
–So Bob has actually written what any idiot already knows. It’s all unsustainable: Greece, Portugal, Ireland, Japan, and yes, the US. But the market lets you know it’s unsustainable at 10% two year yields, (like Portugal). Not at a two-year rate of 65 bps like the US. Note to Bob (and to self), the market will give you the clues, and the drop in the euro is one of them…
