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MAKING CENTS OUT OF THE NEWS
Blog #25
(August 8th, 2011)
Poor Report Card from S&P
By Tom McAllister, CFP®
As all my readers surely know by now, last Friday night Standard and Poor’s, one of the three top debt rating services, did the expected. S&P announced it was lowering their rating on long term U.S. Government debt by one level, from AAA to AA+. Again as expected, the mainstream press exploded with comments over the weekend. Meanwhile, the White House response was to “attack the messenger”, claiming S&P got their numbers wrong. S&P retorted that, even given the White House’s version of the situation, they would stand by their reduction in rating. S&P explained that their primary concern is the future, not the past.
In effect, S&P was issuing report card grades to our government leaders, with a grade of F assigned to both Congress and the Administration, and an “Incomplete” for the Judiciary (OK, that last rating was mine, not S&Ps. But due to the U.S. Senate, our federal judiciary has too many open slots.)
My own take appears to agree with the vast majority of the American public – the S&P move was justified. In fact, I pointed out two weeks ago that I expected a lowering of the U.S. credit rating as the result of ten years of out-of-control spending and lack of discipline on the part of our federal leadership. I pointed to the resulting debt load, now nearly 100% of our annual Gross National Product (GNP). (Anything over 90% 0f GNP is considered troublesome by independent observers of countries around the world.)
Aggravating the situation is the fact that our deficit spending has also exploded, tripling annually under President Obama. A case may be made that part of this was necessary in 2008 and 2009 due to the toughest economic challenge in 70 years. But the majority of the public believes the administration has not measured up to the challenge financially. Under normal circumstances, I believe “gridlock” is good in Washington. In this case, however, gridlock has undermined our financial wellbeing around the world.
What should investors do, if anything, about this situation?
For starters, stay calm. I doubt seriously if interest rates throughout the U.S. will go up to any great extent. Reality is that an AA+ rating is still a very high one, and the primary customers for our long term debt have few if any alternatives. We are still the strongest economy in the world, and our debt WILL be serviced, as I pointed out in last week’s blog, by whichever party is in control in Washington, D.C.
So far as the stock markets are concerned, I expect little change in the next few months. We could see some additional selling by short term speculators and panicky public participants in the next few days. This will be the result of fears of a global recession, rather than the moderate reduction in debt rating. As I said here last week, I do not see a recession here in the U.S. despite the disappointing numbers being reported this year. We might see slightly negative growth here in the third quarter, but our corporate earnings continue strong and we should see better numbers by year end.
What is needed is more realistic leadership from our national political leaders. My hope is that the universal unhappiness with the situation may well be just what is needed to break the gridlock in Washington.
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