Down and down the Dow goes, where it stops…
…nobody knows.
Right now, in a move that should surprise absolutely no one, the market is down significantly (as of this writing, 325). A great deal of the slide is almost certainly a reaction to late Friday’s S&P downgrade of the US debt. Will the market continue a downslide, or has there been enough of a correction? Your guess is as good as mine, and as good as S&P’s—which probably isn’t very good.
On Saturday I wrote a post about the downgrade that engendered some of the most vociferous criticism ever in the comments section. I see no reason, however, to change my mind, although of course reasonable people may differ (here is a statistical analysis of S&P’s abysmal track record at forecasting, if you’re interested in that subject).
But it’s not about S&P anymore, if indeed it ever was. They’re a player in the game, of course, but the important question is how bad will the repercussions be. There are no answers, but here are my thoughts:
—This cannot help but have a negative effect economically in the short run. It could be small or it could be big, but some of the effect depends on how panicked people become. Fear may not be the only thing we have to fear, but it is something that feeds on itself and tends to exacerbate the downturn, sometimes a great deal.
—If you’re looking at the political repercussions—yes, this hurts Obama, who is rightly seen by both sides as a non-leader. But if you think it automatically helps the Tea Party, I believe you’re wrong, because (as I said on Saturday) the S&P statement could just as easily be seen as an argument to raise taxes, as well as a criticism of the Tea Party’s “brinksmanship” (S&P’s word, not mine).
—Here’s the good news, though: it could be the wake-up call for Congress to actually do something effective about the long-term debt. I wouldn’t sit on a hot stove till that happens, though.
Just heard The Won go blah blah blah again on TV. Same ole same ole.
He wants to blame the downgrade on the Tea Party…they caused the negotiations to drag out.
He still doesn’t get it. He seems to think these people sneaked into Congress in order to just cause problems.
Got news for ya, buddy (and your friend Axlerod)…those people got elected BY CITIZENS who happen to feel (correctly) that we need to make fundamental changes to the way we manage our country’s financial affairs.
You blame them for not being willing to compromise on things…just like you and your party compromised before the 2010 elections when passing the worst piece of junk legislation ever (Obamacare), huh?
Remember what you guys said in 2008?
“Elections have consequences.”
(The Dow dropped about 100 points as I wrote this after you, Mr. Yak Yak, got on TV to blah, blah, blah again.)
30 years of a debt culture is being wiped out. I remember in the Nixon/Carter years how you should buy as big a house as you could swing because huge inflation would make your mortgage go down in real terms. More recently I’ve wondered how people could afford the notes going with the huge houses in our affluent CT town. I suspected that most couldn’t really afford the payments, but now I now this to be true.
Government participated in this via Fannie Mae to feed the aspirations of the middle class first, then accommodate the social justice crowd. This was just an overlay on the early retirement movement popular in the 1980’s.
A return to realistic views of personal responsibility is in the works. But a renewed emphasis on real economic growth with optimism rather than Green despair will go a long way.
I disagree, Neo.
The S&P downgrade is not just a forecast. It is a staement of where the USA is now, merely stating the obvious. It is acknowledging chickens are roosting above our hatless heads.
Welcome to Venezuela.
Welcome to Weimar Germany II
JUST as i said, BEFORE Obadiah won…
Texexec, Out of curiously did you notice how often glorious leader used “I” while shifting blame to a movement that only came into being as a response to the ruinous spending by his administration?
I am not an economist but does else anyone feel this type of adversarial pontificating may put a damper on investment? Rather amusing in a way.
Russia long ago told us too…
about the time ‘someone’ broke into the world bank computers and severed the internet communications lines (moving lots of business to a then new Russian communication satellite). and note who has been coordinating the currency comments and such…
but i guess we forgot the quote about a crisis… ‘
or the quotes that say to have everything happen in 2012… you know, that way, everyone thinks any commentary towards that, has to be a tin hatter. after all, everyone knows that because of that, nothing can happen in 2012…
lets see…
when they lower the welfare money, so that the people who were taking pics of obama with blackberries in the soup kitchens will be very angry.
and i dont think that their locking us down piece by piece as in philly today, will work… as the people who are going to act out… will drive us over the cliff and facilitate what they desire, and even hinted about, as they always do…
Venezuela, indeed.
Obama´s words could as well have been said by Hugo Chavez: No matter what S&P says, Venezuela will always be AAA.
It´s so discouraging to hear such a populist demagogue in charge of the USA.
Artfldgr re Weimar II-
I think the probable outcome is still in doubt. I am not persuaded the Fed can today push us down the inflationary road with Weimaresque velocity.
I am more inclined to expect deflation, in an inexorable downward trail, which will be at least as severe as 1933-40. If the Dems+RINOs raise taxes so the rich “pay their fair share”, that will make the downward gradient yet steeper. So not an economic replay of 1922-23 Germany. Then, it was largely confined to Deutschland. Today it is inescapably global. No sanctuaries.
Our true Weimar danger is that we will get an another demagogue replacing Barack, e.g. Trump.
Don Carlos
The Fedsury is ALREADY mimicking Weimar: printing money using the IDENTICAL mechanism.
For some reason, modern commentators don’t note that Weimar printed money/ issued debt to its central bank — step for step identical to the Treasury and Federal Reserve.
Next, QE1 and QE2 are certain to be followed by QE3. That’s what the budget numbers mandate.
China is rebelling. She, Japan, Taiwan, Russia and OPEC are the big buyers of Treasuries. We can’t sell our debt in volume any more.
It’ll have to be printed, and printed, and printed.
To print money is to hyperinflate the currency. Hyperinflation is not inflation on steroids. It’s a wholly different beast.
Money printing = Hyperinflation.
They are a mathematical identity.
Price movements in essential inputs like oil have ramped like crazy since QE1. So you’re dreaming about deflation.
The Congressional budget mandates hyperinflation.
Hyperinflation DESTROYS banks. Do note what happened to BAC today. ( down 20% )
The other big losers are the insurance industry. Hence, Buffett is about to be pounded. He’s in all the wrong areas: banking, insurance and financials.
The extreme price movements, which gives hyperinflation its name, only occur during the end game. The damage to the economy happened all along.
Weimar was hyperinflating in 1919 — but no one talks about it. Instead, the focus on the final dramatic blow off in 1923. But anyone holding government bonds was destroyed, utterly, long before 1922!
None of those price increases were anything but a reflection of the collapse in trust in the currency. Prices weren’t going up at all — it was the currency that was falling.
While the S&P downgrade may have somehing to do with the swoon in the stock market, I think the European financial crisis is a bigger factor. Treasurys RALLIED today in spite of Friday’s downgrade.
We’re seeing a market panic very similar to what happened after Lehman filed for bankruptcy. Another huge volume day in stocks traded. Gold is up almost $70 today. (I remember it was up $100 the Monday following the Lehman bankruptcy.) VIX is up 30% to 45. Bank of America is down 20% in a day. Oil down $6. This is extreme market panic action.
The damage seems to be done. Deep cyclicals and industrials like CAT and DE are down more than 30% from their peaks earlier this year. MTW is down 50%. Investors seem to believe that whatever the cause, whether it’s the sovereign debt crisis in Europe, or the wrangling over the debt ceiling in the U.S., the global economy is headed back into recession.
Don Carlos,
you dont know your history…
period
The other big losers are the insurance industry. Hence, Buffett is about to be pounded. He’s in all the wrong areas: banking, insurance and financials.
good call, he was downgraded too…
I’ve been planning for inflation since Obama took over, but I’m beginning to think that deflation is the more likely result of him killing the economy.
Neo, while I don’t think economic analysis is your strong suit, and that’s the reason for all the strong comments on Saturday—I agree with Occam’s beard on almost all his points of disagreement—I do think you’re very politically astute. Your observation about this being a wake up call to Congress is well taken. We can only hope that our elected officials are shaken up sooner rather than later….because this has the potential to get much, much worse. And even in the best of possible outcomes we have a lot of rough sledding and volatility ahead.
Inflation…deflation….hyperinflation…we just don’t know. The one thing we can count on, is a liberal never noticing the more power his world view attains, the quicker all handbaskets head towards hell.
“Here’s the good news, though: it could be the wake-up call for Congress to actually do something effective about the long-term debt. I wouldn’t sit on a hot stove till that happens, though.”
The House repealed Obamacare. Would have saved trillions long term. They passed the Ryan Budget. Would have restored fiscal sanity. They passed Cut, Cap and Balance. Would have saved the day and allowed States to require the Feds be responsible.
When you say “serious” what do you mean for goodness sakes?
Webutante: the thing I can’t seem to get across to a lot of people is that the S&P downgrade was not an economic analysis on their part, it was a political one. They based their reasoning on an attempt to forecast politics and its effect on the debt.
And in addition, they didn’t even get the math/economics correct. They made a $2 trillion mistake.
I think people on that thread were getting into the economics of the debt situation (and I agree the situation is dire) without paying much attention to what S&P actually said in its own statement (perhaps some of them didn’t even read the statement?), and the process by which it got there.
That was my focus in the post. And that was S&P’s focus, as well. Their downgrade was sparked by the fact that they didn’t like the way the debt ceiling negotiations went—their contentiousness, and the “brinksmanship.” Nothing else had changed in the US debt situation recently, except that it had gotten ever-so-slightly better as a result of those negotiations.
Thanks for saying I’m politically astute. But I’m not so sure I am. What I think is my stronger suit is critical thinking. At least, that’s what I aim for.
Change “serious” to “effective”. You get the point.
Obama’s speech today was wrong on just about every point. First he denigrated the ratings agencies. Then he blamed the intransigent TEA Party members of Congress. Finally he proposed three policy steps that essentially mean more spending and higher taxes. I watched gold go higher and the major indexes drop as he spoke. At no time did he mention anything about drilling, mining, logging, nuclear power, free trade, manufacturing, or other such things that actually create economic activity and jobs. He is an economic illiterate! But we knew that. It’s going to be a rough ride.
There is a way to get through this but it will require Congress and Obama to make some real cuts and to encourage some real economic activity other than “Green” jobs. Write your Congress critters.
Mike Mc: I mean Congress—as in both houses, as in passing legislation that becomes law.
The House passing something is, unfortunately, just for show, if the Senate doesn’t pass it as well. The House is Republican, the Senate Democratic right now. So that’s the way it’s been going. The first time that might change is 2012, and I’m not at all sure that both houses will end up Republican at that time, although it’s a possibility. It’s also, as I said, a possibility that the S&P downgrade will put the fear into enough members of Congress that some effective measures will be passed even before then. But I am doubtful that will happen.
scott says, “While the S&P downgrade may have somehing to do with the swoon in the stock market, I think the European financial crisis is a bigger factor. Treasurys RALLIED today in spite of Friday’s downgrade.”
I agree. Yes, the downgrade has everyone chattering and is symbolically important; but the Euro Zone is in deep trouble and that is the real threat to the markets. The ECB is gearing up to pump newly minted cash into the teetering Italian and Spanish banks but in the end it will be shown that they are simply too big to save. The EZ is where we will see the first sovereign default. Greece will be first, but not the last EZ nation is go belly up.
Gold (and silver) and US T-bonds will be the ‘safe’ havens for all the cash that will be pulled out of the markets in the days ahead. That is, as you note, the real story today.
S&P also downgraded Fannie, Freddie, and several other government related entities such as the Farm Credit Bureau. All are quasi-government lenders tied to the USD. We should remember that back in the dark days of 2008 S&P took a great deal of heat for their rosy ratings of the mortgage derivative market, the credit default swap roulette wheel, Lehman Brothers, AIG, Bear Stearns, etc. Now it seems they’re trying to be realistic for a change. But have no fear, Moody’s knows where their bread is buttered and still rate the USA as triple A.
Neo, you are a critical thinker par excellence.
And we all have fundamental assumptions from which we begin that process. To me the Hayek/Keysian fork in the road is extremely important and fundamental to critically examining what’s happening. I don’t want to revisit that again.
I have not listened and relistened to S&P’s John Chamber’s interview over the weekend several times and even took a few notes. I did not hear that the political brinksmanship—the process—was the only factor in this downgrade…
Politicians failed to address many of the structural problems within the entitlement system here ( as say a France has done by raising the retirement age by at least 2 years) in meaningful, bi-partisan ways that S&P thought would stick and not be rescinded.
Furthermore, the S&P warned (global warning!!) the U.S. could be downgraded two times this year—on April 18 and again on July 14, according to Chambers.
I still think this is long overdue no matter what the final straw was and possibly can have long-term good effects after we go through some pain.
Artfldgr,
I am quick to agree I don’t know Weimar history as well as you. But that doesn’t prove me wrong. Slashing asset values across the board, across the globe, (excepting Au/Ag, which are fear-driven, and which I own) is not inflation.
The struggle remains between inflation and deflation; we tried the easier way between, incremental creeping inflation for ~25years, to (now) no avail. We are paying the piper for our wretched escesses.
Philosophically, I tend to favor deflation, because that rewards saving and self-sufficiency. Inflation rewards accumulative excess- encourages debt to buy something, buy anything, just buy.
I know enough about Weimar to understand that citydwellers starved because farmers would not sell their wheat.
Well, that’s new: I am “awaiting moderation.”
Don Carlos: I’m getting a message from the spam filter that it’s having some sort of delay checking some of the comments. I think this happened once before; don’t know why.
But Neo – You imply that the problem is bipartisan because the solution must be bipartisan. That is not necessarily true.
The House is right; the Senate is wrong. The proof is the passing of a budget. The proof is even bringing up for discussion any House initiative.
Anyway, the solution is not necessarily compromise either. The solution is the solution. Getting there may be a matter of the Senate moving to the House side. It no doubt is. It certainly is.
Either that gets done, via this Senate (unlikely) or electing a new one (likely), or the U.S. Fails. Since that is unimaginable and the worst case, then the solution will be found and the other side will lose.
Defeat is not a compromise position. One side is going to win this fight and one side is going to lose. It’s come to that and there is no changing it at this point.
webutante: I’m not talking about his interview. I’m talking about the official S&P statement as to why they made the downgrade. I’ve linked to it several times; here it is again.
I’m not saying “brinksmanship” was the only factor in the downgrade. But it seems to have been the critical factor that turned the tide for S&P and caused it to downgrade at this point. At least, that’s the way I read it.
Apparently, in the original report S&P wrote explaining the downgrade, economic factors were more prominent. However, when it was pointed out that they had made a $2 trillion error, they made the political more important.
Thanks for the critical thinking compliment. I wasn’t really fishing for that :-).
Mike Mc: I have no idea why you say I am implying the solution must be a compromise. I am implying nothing of the sort. I am simply stating reality. A bill passed by the House only is not a bill that affects anything. It is not effective.
After 2012 the solution can be one party only, if only one party controls both houses of Congress. Until then, the reality is that each house is controlled by a different party. So if there is to be a solution now, either one party must capitulate (or enough members of it must) for whatever reason (principle, manipulation, fear, threats, whatever), or a compromise must be reached. I don’t see how that can be disputed.
“”the thing I can’t seem to get across to a lot of people is that the S&P downgrade was not an economic analysis on their part, it was a political one.””
Neo
Pretty much like an individual looking for a loan is going to have his character and reputation taken into account. Otherwise you’ll completely overlook the fact that some people making a million bucks a year are worse credit risk on a car loan than a guy making sixty grand.
I will leave the political and economic analysis to others more knowledgeable than I.
I am sick-to-death of this perpetually petulant pantywaist of a president refusing to ever accept any personal responsibility or admit error. I’m not sure what he is, but he isn’t a man.
SteveH: I was responding to a commenter who mentioned my lack of economics expertise, and I was making the point that the S&P judgment was based to a great extent (and in their own admission) on their assessment of what would happen politically in the US and whether the debt would be successfully tackled by politicians, rather than on some arcane economic knowledge.
It is an entirely separate issue as to whether S&P should be making such politically-based economic forecasts. And it is still another separate issue as to whether they were correct in their prognostications about whether America’s politicians will be able to get the debt under control in their next effort to do so.
kaba: I think everyone, including the left, has become quite sick of Obama.
My personal opinion is that it’s entirely possible that Obama himself may be getting a bit sick of being president. I don’t think he’s finding it as easy as he thought it would be.
“not an economic analysis but a political one”
I don’t think one can meaningfully assess a country’s creditworthiness, at least as far as long-term debt goes, *without* a political/cultural analysis.
If a company has several board members who are in extreme conflict, and some of them are behaving very irrationally in terms of how they spend the company’s money, that is certainly relevant to rating the company’s bonds.
Well I for one am moving on from this discussion since we all make imperfect judgment calls/decisions based on tangible as well as intangible factors, even in the midst of critical thinking.
The S&P warned, it finally made good on its warnings and we’re now in the throes of a panic reaction which is putting this country in historic, unchartered territory. No one knows what’s going to happen.
I’m ready to address where we go from here and try to separate the silliness from the serious aspects of this crisis. President Obama is way over his head here as well as the likes of many of our politicians. How this all plays out is more imporant to me now than the imperfect way it all came about.
My profound parting shot—it is what it is….
david foster: but if you read S&P’s statement, the agency appears to have heavily based its decision on political prognostications of a speculative nature, mainly extrapolating what happened during the debt ceiling negotiations into future negotiations on reducing the debt.
And S&P screwed up royally in its own economic calculations, and hardly took a moment to reconsider.
They may end up being correct, but their reasons for the downgrade are the wrong reasons, and are way too politically based.
You may be right neo. I’m no fan of H. Clinton, but her 3:00 AM emergency phone call ad in the primary was amazingly prescient.
Neo wrote, “Thanks for saying I’m politically astute. But I’m not so sure I am. What I think is my stronger suit is critical thinking.
Agreed.
I liked the post on Instapundit that said:
The DOW dropped 637. But without the Obama speech it would’ve dropped 737. Therefore Obama saved or created 100 DOW points.
HA HA HA HA ~! 8)
I kinda understand grievance filled Obama raised by commies. I just don’t understand the people that like and support him. They’re a weirder anomaly than he is and may go down in history as the bigger story.
I’m seeing reports that S&P may get hauled before Congress because of the downgrade.
Yeah, that’ll restore the markets’ confidence.
Morons.
At some point people start saying that we need a Cromwell who will send these idiots home.
neo . . .
I get the impression from your comments that you expect the S & P and other rating services to predict the future. They’ve already proven that they’re run by human beings who make mistakes. When reading about their ratings, keep in mind that the ratings are based on different variables.
I invested in several mutual funds that claimed that they used mathematical models to get results. These funds have all performed differently.
“I just don’t understand the people that like and support him. They’re a weirder anomaly than he is.. ”
Think zombies.
Promethea: Of course I don’t expect S&P to predict the future. But I think that’s what they’re trying to do, and their track record is rather poor (plus, a $2 trillion mistake is pretty large, don’t you think?)
Did you actually read the article that I linked to in the post? Here’s a relevant excerpt:
Obama was off by 2T as well back in 2009. I just can’t get my head around that much debt.
http://www.usdebtclock.org/
Watching that puppy spin should make anybody literally crap their pants.
It’s not complicated. There are those who have made it so. Those who want something for nothing, and who have been electing those who are willing to give it to them for a vote.
To quote Ry Cooder in a song from Bop ’til You Drop, “There ain’t no way outta here without a fight.” We may as well get the show on the road. Our kids and grandkids have nothing to do with this. Yet they will fight, and they will pay.
That’s bullshit.
“.. the country with the worse S.&P. rating is likely to have proven to be the safer bet.”
So I should buy Greek bonds? 😉
Don Carlos
does your assesment include printing money and loaning it out to the big players at near zero percent interest…
do you realize that withe devaluation printing, and inflation not being zero, the interest rate is actually BELOW zero?
you SOUND so erudite… but that is not real, because your points DEPEND on not noticing the whole picture and being right in a section of it.
now, explain to me how 1 million squared times 64 can be paid back by 300 million people when less than 40 percent of them are gainfully employed, and already taxed?
let me put this in your pipe to smoke
the poor are going to riot when it costs 4 times the amount of dollars to buy the same thing that 1 dollar bought before obama..
the reason is because welfare cant go up 400 percent to cover expenses…
think on that one..
45% are on some form of it..
what happe4ns when you take the housing, cell phone cable, and electric entitlements away from 30%?
care to see videos of the people machine gunning a bus because someone commented to a woman not to spank a child…
imagine when you take away their money…
1 million squared times 64 / 300,000,000 = 213,333
Average/Mean salary… about 40k
Don Carlos… see a problem here?
[img]i800.photobucket.com/albums/yy282/quekjonathan/FederalReserveMoneyPrintingResearch.jpg?t=1265243693[/img]
this is where understanding what gold means..
ie… not long before obama went into office, gold was 300… to 400… lets say 400
today, gold is just below 1800… so lets say 1800
every dollar you had when it was 400, is now worth 22 cents
or rather. you would need 4.50 cents to buy what 1 dollar bought then…
or, to explain why china and other are pissed…
you only need to pay back a billion with 1 billion dollars only worth 220 million
equivalent DAILY inflation rate…
Hungary july 1946 / 195%
Zimbabwe 2008 / 98%
Yugoslavia 1994 / 64%
Germany 1923 / 20.9%
Greece 1944 / 17.1%
China 1949 / 13.4%
now if YOU want to get an idea of what it REALLY is…
then you cant look at our inflation reports…
you ahve to look at things like GDP deflator
The GDP deflator is derived by dividing current price GDP by constant price GDP and is considered to be an alternate measure of inflation.
after all, if you look at the CPI index inflation numbers, which i am sure you are, you are seeing inflation low… but you also haven’t taken the time to see what they use to calculate it.
if you look at this number
http://www.tradingeconomics.com/ChartImg.axd?i=chart_9562cd3a05c347a093c3e8865621e4e2_126.png&g=c764db3d01804d7190eec35ef29035f5
you can see that it NEVER went down…
AND they start the graph at 1980…
(care to guess why? the number was too small prior to that to be included)
it just stumbled in the switch over from actual to ESTIMATE….
the problem is that the values are not real as they were in the past!!!!!!
how is that possible?
well, what year did the government start giving our money away at a below zero rate?
http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html
if the rate of a loan is less than inflation, then your giving the money away as fast as you can print it.
the fed interest rate in 1980 was near 20%
if you plot it with the inflation.. you can figure out which years they gave away money for less than nothing
how come inflation didnt arrive?
because at that time, the money was given away to big people, and they bought FOREIGN assets… so the money never got to circulate in the US…
ie… they suddenly started using the worlds currency as a counterfeiting operation..
just as progressives used democrats and liberals to where their skins as wolves in sheeps clothing
they did the same with our currency, debasing it by gutting its reputation by abusing it with counterfeiting using the real presses… (so you cant take out the fakes)
couple that with the super bills too…
and what will happen soon as people start tallying in a crisis?