Tuesday, August 9, 2011

Time To Down-Grade S&P?

The downgrade of USA by S&P was more of a political statement and the timing could not have been worse.
Here is a rating agency, which along with other rating agencies has caused the financial crisis in the 1st place by giving triple A rating to all the CODs and MBS during 2002-2007 and then come out and downgrade a sovereign nation even when there has been no actual default. What were they smoking?

In fact rating agencies have no business of rating countries. Market does a better job of that. How long it took the rating agencies to downgrade Greece in the 1st place?

It is given that the debt situation in USA is grave and only way America can pay its debt is by printing more dollars. But in a deflationary environment, where values of assets are and will get destroyed, printing more money is not yet a cause for alarm. Inflation is still not a major issue in USA. 

ECB has already started making noise about stripping the power of the rating agencies.  The bond market actually did opposite of what S&P said. And now US Senate is contemplating to start an investigation in the conduct of S&P.

I think S&P can expect a serious and powerful backlash from the world Governments in the coming days and months. They can expect multiple cases filed against them on various charges.  Politicians on both sides are gunning for them.

Coming back to the market, it was a grand show of circus aimed to scare the hell out of investors. But 2011 is not 2008 and the world Governments will react more quickly and with more liquidity every time there is a sell-off. Can they continue to prop up the markets forever?  We are back to the point where we were before the start of QE 2. The next sell off will be far more severe and deep.

Let us now see how far the rally goes and if it fails to make a new high, then we can be sure that a new bear market has indeed started.  We need to watch the market action for the next few days to get a feel of the direction. 
Till then, be safe out there.