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Tuesday, August 09, 2011

Blaming S&P

Being in a hotel right now, I have cable TV. Therefore, I get to see a number of pundits who seem to be blaming S&P for the ongoing market turmoil. My initial reaction is that this is a bit like a guy who eats bacon and mayonnaise sandwiches three meals a day, smokes two packs of cigarettes, doesn't exercise, and then blames the doctor who reports his high blood pressure for his insurance being cancelled.

3 comments:

  1. Perhaps. But I think it may be more like a guy that eats bacon every once in a while and is getting to the age where he's thinking it may be smart to switch over to turkey bacon, two or three doctors agree that would be wise, and then another doctor comes along, freaks out, and tells his insurance company he's on his death bed.

    I'd work the bond market into that analogy except I can't think of how I would do that.

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  2. My second reaction was to think that Daniel's scenario might also be the case.

    But I just don't follow the sovereign debt market enough to have an informed way of deciding between the two analogies. Anyone have any interesting pointers to good analysis here?

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  3. I think the scenario in Gene's original post is more likely. Japan was downgraded to AA+ when its debt-to-GDP (not that this is the only rating factor) reached 60.4%. S&P and Moody's have had a negative outlook for the US for at least the past year based on our increasing deficits. We're pretty much following the path Japan did (perhaps down to their AA- in a decade)

    http://www.theatlantic.com/business/archive/2011/05/chart-of-the-day-us-debt-following-japans-trajectory/239387/

    Our debt-to-GDP has risen to 85%. Egan Jones Rating (NRSRO) as well as a Chinese ratings agency had downgraded us weeks ago so S&P's rating isn't completely out of the blue.

    A 50% increase in debt over a decade (+$5 Trillion) combined with a recession is going to have some effect on bond-repayment risk. This is definitely the eats bacon and mayonnaise sandwiches, doesn't exercise and now his blood pressure is up 50% from 140 to 210.

    Besides, a AA+ is not analogous to a doctor freaking out and saying he's on his death bed. AA+ indicates a "very strong" likelihood of getting paid back versus "extremely strong" for AAA.

    Death bed would have to be junk status or below.

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