Thread in which the world laughs at America

[KrazyHorse]

It's their job to make these calls, no matter the market. We're at 100% of GDP on gross debt and our political system just kicked the problem down the road. I have a hard time criticizing.

Their calls are at best long-delayed reactions to the market and at worst politically-charged attempts to maintain their rapidly-diminishing relevance to the market.

Wonder why credit protection on US govt obligations is a third the price on France's? Because nobody is willing to spend their own money on the wager that France is more creditworthy than the US.

[DanS]

You just said that they were very relevant to the market re CSAs. Why are they all of the sudden not relevant? Do you believe the CSAs will be rewritten?

[KrazyHorse]

Yes, they are still relevant for CSAs. Duh. That does not mean that their relevance is not far lower now than at any time since their founding, nor that their relevance does not continue to decrease.

[DanS]

It seems to me like they are very relevant. For sure, this will be headline news for a few days and it will have consequences. Leave it to the historians to put S&P's power in relative terms.

Fundamentally, do you disagree with them re the medium-term financial shape of the US? It seems like an unassailable opinion to me.

[Tupac Shakur]

Fundamentally, do you disagree with them re the medium-term financial shape of the US? It seems like an unassailable opinion to me.

I think Kevin Drum is right on this...

The United States has been running up big debts for the past couple of years because we're trying to climb out of an epic recession: jobs and economic recovery are exactly where our fiscal spotlight should have been. As a result, we've been focusing on our long-term debt for, literally, less than a year. Pretending that our political system is fundamentally broken because we haven't solved our long-term entitlement problems in a few months is staggeringly panicky and ahistorical, and S&P's weird obsession with hitting a $4 trillion target for medium-term deficit reduction is economically vacuous. If we still can't get our act together in four or five years, then fine. We deserve a downgrade. But a few months? That's crazy. It's the kind of hair-trigger reaction that belongs on cable shoutfests, not in the boardroom of a sober, 150-year-old financial firm.

http://motherjones.com/kevin-drum/2011/08/why-sp-wrong

[DanS]

Kevin Drum has been living in a cave. Our medium-term financial problems pre-dated the recession. We didn't deal with the problems then and there is little sign that we are dealing with them now.

[KrazyHorse]

It seems to me like they are very relevant. For sure, this will be headline news for a few days and it will have consequences. Leave it to the historians to put S&P's power in relative terms.

Of course it will be headline news; the people running financial news organizations are operating in a trading mindset from 20 years ago, or from a non-quantitative banking mindset.

Fundamentally, do you disagree with them re the medium-term financial shape of the US? It seems like an unassailable opinion to me.

Then go out, short treasuries and long French bonds. Free money.

[DanS]

I don't think that French bonds are AAA risks either. The Brits seem like a very good risk.

But I would like to hear your real opinion on my question.

[KrazyHorse]

There are 2 S&P AA+ rated countries (Belgium, New Zealand) and 6 AA-rated countries (Abu Dhabi, Bermuda, Kuwait, Qatar, Slovenia, Spain)

S&P is placing the US at AA+ with a negative outlook.

Want to bet that in 18 months the US' credit spread will be closer to its current value (55bps) than it will be to the average of Belgium and New Zealand's spreads (not sure I can get publicly available quotes for these)?

[KrazyHorse]

But I would like to hear your real opinion on my question.

My opinion is that the market knows more than me, you, or the ratings agencies.

See my above post for a quantitative measure of my opinion.

[KrazyHorse]

Belgium is trading at 226 bps according to CNBC. I have a number for NZ, but it is proprietary.

[DanS]

Medium-term is 18 months?

I hope that this downgrade is a wake-up call and that we will get our house in order. It is distressing to me to see the financial position of the country and to see the political class thinking in small terms.

[KrazyHorse]

That is the timeline S&P has placed on a downgrade.

[KrazyHorse]

If we go any longer than 5 years out we will have to use swap spread data because the cds market becomes fairly thin.

[DanS]

That is negative watch. That could change pretty easily in the interim, of course. F.e., after the election.