It’s Not Armageddon?

08/08/11 Poitou, France – Oh la la “it’s not Armageddon, but it feels like it!”

Sometimes the news flow is slow.  Here at the Daily Reckoning, your editor is forced to write about theory…history…or the weather.

But sometimes the news comes so fast he can barely keep up with it.

Last week, for example.

“Europe sparks global sell-off,” was the Financial Times’ lead headline on Thursday.

Italy’s debt was sinking in the bond market.  The Italians need to borrow more than $200 billion a year to stay afloat.  But yields (the cost of borrowing) were rising to the point where it would soon be impossible.  And Europe’s bailout fund doesn’t have enough money to save the Italians.  The European Central Bank announced that it was buying bonds on the open market.  But nobody believed the ECB could or would be able to support the market on its own.

This was followed by Friday’s FT headline:

“Stock markets plunge worldwide.”

All over the world, stocks fell on Thursday (reported on Friday).  Some sellers sold because they were afraid of Europe.  Some sold because they were afraid of Asia.  Some sold because they were nervous about the US.  And some sold just because everyone else was selling.

Daily Reckoning readers, however, did not sell.  They already sold long ago, because they don’t like the looks of the whole thing – they think the whole world’s capital structure is soaked in debt.  Until the debt is wrung out…or dried out…they’re staying away.

Friday’s markets closed lower, but not much lower.  The Dow lost 60 points.   Gold ended the day down just $7.

And then, late in the day on Friday, another bombshell hit the newswires.

S&P downgrades U.S. credit rating for first time

By Zachary A. Goldfarb

Standard & Poor’s announced Friday night that it has downgraded the sterling U.S. credit rating for the first time.

The move came even though the Treasury Department said that it had found a math error in the firm’s calculations of deficit projections, according to a person familiar with the matter.

S&P decided to lower the AAA rating, held by the United States for 70 years, to AA+ after a bipartisan debt deal signed into law this week failed to assuage concerns about the nation’s growing spending.

Analysts have said a downgrade could increase the cost of borrowing for the U.S. government and lead to tens of billions of dollars in more interest costs per year. That could translate into higher borrowing for consumers and businesses, too.

A downgrade would also have a cascading series of effects on states and localities that rely on federal funding, including in the Washington metro area, potentially raising the cost of borrowing for schools and parks.

But the exact impact of the downgrade won’t be known at least until Sunday night, when Asian markets open, and perhaps not fully grasped for months. Analysts say the immediate term impact is likely to be modest because the markets have been expecting a downgrade by S&P for weeks.

So, what happened Sunday night?  Keep reading…

And more thoughts…

Asian stocks fell hard!

BANGKOK (AP) — Asian stocks nose-dived Monday as the first-ever downgrade of the U.S. government’s credit rating jolted the global financial system, reinforcing fears that the world economy is weakening.

Among the major Asian markets, Hong Kong’s Hang Seng tumbled 3.8 percent to 20,145.82 and South Korea’s Kospi was down 3.8 percent to 1,869.45 after briefly diving nearly 7 percent. Japan’s Nikkei 225 stock average dropped 2.2 percent to 9,097.56.

Futures pointed to losses on Wall Street when it opens Monday. Dow futures were off 260 points, or 2.3 percent, at 11,142 and broader S&P 500 futures shed 31.30 points, or 2.6 percent, to 1,166.10.

“It’s not Armaggedon, but it feels like it,” said Hong Kong-based analyst Francis Lun.

*** Oh la la… and then what happened when markets opened in Europe?  Wait…the ECB came to rescue.  Here’s the AP story:

Late Sunday, the central bank said it would “actively implement” its bond-buying program to calm investor concerns that Italy and Spain won’t be able to pay their debts. Last week, worries over the two countries’ ability to keep tapping bond markets contributed to the turmoil in global markets, which saw around $1.5 trilliion wiped off share prices.

Milan’s FTSE MIB was up 2.4 percent, while Spain’s rose 3 percent. Their recoveries in the wake of dramatic declines in their borrowing costs helped most European markets open higher despite earlier falls in Asia.

*** And that, dear reader, is where it stands as markets open in America this morning.

*** Off the front pages, there were some other interesting stories.

For example, this little item from the New York Times tells how lawmakers react to a debt downgrade:

“…several lawmakers have publicly questioned whether the ratings agencies have the competence to evaluate the country’s finances, and whether it was appropriate for them to be so deeply involved in discussions of fiscal politics,”

In short, they were indignant.  They thought they had bought the rating agencies when they bought Wall Street. They must feel as though they have been cheated.

The feds paid trillions to bail out the automakers and the big banks.  Since both industries now rely on the government for bailouts both are happy to go along with the politicians, no matter how absurd their plans.  That’s why Detroit climbed aboard on Washington’s latest minimum gas mileage requirements.  You’ll recall that the last time the feds imposed mileage requirements, about 4 years ago, the automakers fought them.  This time – a major bailout later – they roll over.

He who pays the piper calls the tune!

The feds thought they had paid enough already to get the rating agencies.  Apparently not.  They’ll have to find another way to bring them to heel.

*** And then, Alan “Bubbles” Greenspan was back in the news too.  He helpfully pointed out, according to this CNBC headline:

“No chance of default; US can print money.”

Yes, we’re happy to see Mr. Greenspan hasn’t lost his touch.  He’s a rascal.  But he’s a smart rascal.  And he knows the US won’t default…at least, not honestly.  Instead, it will print money.

Regards,

Bill Bonner,
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010. 

 

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• November 18, 2011 -- More Questions Emerge as the Debt Crisis Continues

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