Why the U.S. Downgrade Matters

Why the U.S. Downgrade Matters

The global economy is descending into a tailspin… mainstream share portfolios have been hammered… and the Aussie dollar has dropped 10% in less than two weeks.

Just when you thought things couldn’t get any worse…

Get ready, dear reader…

Because tonight the busy-bodies and sticky-beaks are set to descend in hordes… sticking their noses in where they’re not wanted or needed.

We refer, of course to the Census.

Fortunately, your editor and family won’t be at home tonight, so we don’t need to fill out their intrusive form.

Yet, the little Oompa Loompas bashing on millions of doors tonight aren’t the only busy-bodies straying where they shouldn’t.

We noted with amusement the joint statement from the G-7.  You can read the full text here.  But here are a few choice snippets:

“In the face of renewed strains on financial markets, we, the finance ministers and central bank governors of the G7, affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close co-operation and confidence…

“We are committed to taking co-ordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth.”

Despite everything that’s happened, they still don’t get it.

The whole reason the market is in such a mess is because of “finance ministers and central bank governors… taking co-ordinated action…”

They’ve fiddled with the market for decades and what you’re living through now is the result of that meddling.

Looking to divert the blame

Not that they’ll ever admit it.

There are others to blame… apparently.

Such as… Standard & Poor’s – the ratings agency.

As you know, we’re no fan of ratings agencies.  But it’s pleasing to see they’ve finally done their job – downgrading U.S. debt.  It follows the downgrade of European sovereign debts – Greece, Ireland, Portugal, etc…

But certain people aren’t happy.  As Dan Denning, editor of the Daily Reckoning noted this morning:

“In Italy, prosecutors have raided the offices of Moody’s and S&P and seized documents.”

Meanwhile, in the U.S., the Washington Post reports:

“A Senate Banking Committee aide says the Democratic-led panel is gathering information on Standard & Poor’s decision to issue the first-ever downgrade of the government’s credit rating.”

Hmmm, perhaps the government is getting revenge on S&P for getting revenge on the government!

All we know is it’s a stinking great mess with governments and central bankers doing all they can to hold on to power.  Trouble is, the more they tighten their grip, the more pain is inflicted on the average Joe and Joanne Punter.

Zombie commentators still don’t get it

But don’t worry.  According to the zombie mainstream Australian press, there’s nothing much to worry about.

Our old pal, Michael Pascoe at the Age wrote yesterday:

“The single-notch downgrade of the United States’ long-term debt by Standard and Poor’s makes for lots of impressive headlines, but it doesn’t actually mean all that much in the short-term – just a historic market along the way of a great power’s slide.”

His Fairfax Media buddy, Jessica Irvine must have attended the same briefing yesterday morning.  She wrote:

“So in the short term, the credit downgrade potentially means next to nothing.”

And finally, over at Business Spectator, Alan Kohler had this to say:

“It’s impossible to predict how markets will react to the huge psychological element of Saturday’s downgrade, but the reality is somewhat less huge.”

Since the “Australia is different” crowd published their thoughts yesterday morning, the Aussie stock market has officially crashed.  Let’s not beat about the bush here.  Stocks have taken an almighty beating.

In fact this morning, the S&P/ASX 200 index is at 3,781.  The market is now just 16% above the March 2009 lows.

Make no mistake, the downgrade of U.S. debt is important.  No investment is isolated.  Every investment anywhere in the world is risk-rated to every other investment.

Normally, when one asset class is re-rated it doesn’t make much difference to other sectors (although it still makes some difference).  But when the re-rated asset is the global benchmark for all other assets, contrary to mainstream opinion, it’s a huge deal.

This is Investment 101 stuff.  To say the rating on the benchmark asset class can change without it causing ructions is simply wrong.  The action you’ve seen in the market the past two days proves that.

Investors now have to figure out the relative risks of every asset and work out if it’s overpriced or underpriced.  They have to decide if the U.S. bond market is still a haven for investors.

Some will decide it is.  But others will decide it isn’t.  In that case, where do they go for safety?

We don’t know the answer to that.  We do know two things: first, it creates huge volatility as investors reassess the market.  And second, we can sure say they won’t flock to the Aussie dollar.  The price action in the Aussie dollar versus the U.S. dollar is proof of that – it’s back to parity as we write.

And that’s not all…

Early warning signals going mad

Our Early Warning Signals have gone berserk… the U.S. VIX index soared 50% last night to end the day at 48 – a level not seen since early 2009.

The Aussie dollar has continued to slump against the Swiss Franc – the Aussie dollar’s supposed haven status is looking weaker (and sillier) by the minute.

And the gold price has taken off.  Not only has the U.S. dollar gold price surged through $1,700, but the Aussie dollar gold price has quickly followed.

It’s a good job the U.S. downgrade isn’t significant!  And it’s a good job Australia has China to fall back on!  Not.

Yesterday we wrote to you saying to get set to buy cheap stocks.  This morning, those stocks – including the ones we’ve got on our watchlist – have gotten much cheaper.

The market remains as risky as heck.  And just as we’ve warned for the past two years, it’s not the place to store your life’s savings.

But now you’re flooded with cash, buying a select number of cheap stocks over the next few weeks makes a lot of sense.  But only if you’re comfortable taking risks. If not, stay in cash and bullion and wait for the volatility to ease.

The way we look at it, if you don’t like taking big risks there’s no harm staying on the sidelines.  If you miss the first 5-10% of a rally, it’s not a big deal.  At a time like this, capital preservation is more important for the risk averse.


Kris Sayce
Money Morning Australia

Kris Sayce

Kris Sayce

Publisher and Investment Director at Port Phillip Publishing
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Tactical Wealth, and Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.
Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments. Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.
It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for. So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook. Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day. Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money! Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read. To have his investment insights delivered straight to your inbox each day, take out a free subscription to Money Morning here. Kris is also the editor of Tactical Wealth and Microcap Trader where he reveals the best opportunities he’s discovered in the markets that you could profit from. If you’d like to learn about the latest opportunity Kris has uncovered, take a 30-day trial of Tactical Wealth here or Microcap Trader here. Official websites and financial e-letters Kris writes for:

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40 Comments on "Why the U.S. Downgrade Matters"

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Where is the “Gold is bad” crowd?

They must be nursing the bandages on their reamed arseholes.



Looks like the conservative Aussie consumer wasn’t so silly after all. Despite being berated by MSM commentators for their caution, they knew in their bones that something BIG & BAD was looming on the horizon.

This is the funniest thing ever! It’s clear the CNBC & Fox chearleaders (including Switzer) have no clue. Why do people rely on these fools. How can you not know that a correction is comming. Aren’t they experts? Why rely on stock markets that increase 30-40% in quick fashion? Has anyone’s business grown 30-40%? Has anyone’s personal income increased 30-40%? A decrease in shares is warranted – they shouldn’t have gone up in the first place. Thanks for all the advice – my super has been safe in cash for 6 months and my gold and silver has gone up… Read more »
I think Kris is overreacting a smidge to the ‘zombie commentators’. I’ve thought, on balance, that some of them—eg Kohler, Padley—are generally fairly measured in their commentary. (If you’ve read Marcus Padley’s book you’ll know he’s something of a stockmarket iconoclast himself). Irvine covered her backside by stating the U.S. credit downgrade ‘potentially’ meant next-to-nothing. And that MIGHT be true… in THEIR context. (It’s NOT, after all, the first effective U.S. default). What is Kohler comparing his ‘reality’ to when he describes it as ‘somewhat less huge’? I think their comments are simply not rabid enough according to Kris’ standards.… Read more »

Well if you’re referring to PF, I’d say he’s waiting for the “risk on” day to make his point. The biggest fear of the Goldilocks army is for someone/something to fail; for risk to be priced accordingly; and for asset prices to represent reality (especially their sacred houses).


I would think that commentators being “measured” is part of the problem: they’re only prepared to repeat what their peers in the establishment say. EVERYTHING they say is said under explicit/implicit assumption, yet they rarely seem to focus on inherent risk with the gravitas it deserves.
So yes, their comments are not “rabid” enough. Much of the time, their words are empty and meaningless.

Peter Fraser

Hi Beau, You’ve come to gloat about the Bledisloe AND gold I presume, that is rubbing it in a lot.

We have to let the gold bugs win occasionally (and the All Blacks). However I’m not totally opposed to gold, just being overweight in it, although right now that doesn’t look like a great play, but all things even out eventually.

Peter Fraser

JC – they are measured because we have a little thing called litigation. Absolutely no-one gives advice anymore, just general information because of that.

Anyone who did would burn like a candle for 15 seconds and then snuff it financially.

Peter Fraser

The all ords have now recovered to be above yesterdays close.


Oh, is that it. If so, can I sue Pascoe for his missives on gold and the SMH for calling AUD a safe haven?