S&P downgrades US debt

The "unthinkable" happened Friday night when US debt was downgraded from AAA to AA+.

While horrifying to me, simply because it was avoidable, I have some hopes this will be considered a tempest in a teapot within a few weeks. I certainly expect tomorrow's stock market open to be down, but there are some mitigating factors at work.

First, the S&P ratings agency is one of the crooks who gave low risk / reasonable quality credit ratings to all those CDOs that were the culprit of the financial crisis. That fact is pretty widely known - and it is like home inspector who gives you a great report, leaves you with a house that has holes in the roof, and has his brother (coincidentally a roof-repair contractor) come for a visit next time it rains.

Second, Europe (the G-7) was hard at work over the weekend soothing fears over the pond about their own credit woes.

Third, this market has been dominated by momentum traders for the last year - meeting all dips with buying fervor. A lot of cash left the market over the last two days, and will be looking for a home.

Fourth, such a downgrade is bad, but Moody's (the other major credit rating agency) did NOT lower their rating.

Finally, when risk goes up, prices tend to fall. In the bond market, you can look at this thusly: if you think a bond is riskier, that means you think that you have a lower chance of being repaid. For existing bonds being traded tomorrow, that lowers the price you can sell them for. People selling those bonds will be looking for better returns and some may end up looking at the stock market (I would propose dividend-paying large cap stocks or ETFs).

A final note is that it will be very interesting seeing the results of the next treasury auction. For bonds to-be-issued, you would demand a higher interest rate to compensate you for the higher default risk mentioned above. Having higher interest rates will cause more issues down the road - paying just the interest on our national debt is doable at the moment because of the historically low interest rates. If you think the bickering over the debt ceiling was acrimonious and protracted - wait until higher interest rates cause us to make really hard choices between cutting expenses and raising taxes.

I am absolutely incensed that ALL of our Congresspeople have forsaken their duties to We-The-People and brought this on. Both Democrats and Republican share the blame here, and the black eye the S&P ratings agency gave us is most definitely their fault alone. We need them to rise above partisan lines and fix these issues: it will take raising some taxes, lowering or erasing some deductible categories, massive cuts in some agencies and freezing the budgets of others, and meaningful discussions about SSI and Medicare.

I am not selling anything Monday morning, and will be looking to buy certain companies at fire-sale prices. As Warren Buffet famously said, "be fearful when others are greedy and greedy when others are fearful."

Regards,
Trond