S&P cuts U.S. ratings outlook to negative

[WildspitzE]

Re: S&P cuts U.S. ratings outlook to negative

the ratings agencies escaped their deserved culpability by saying that they were exercising their first amendment rights to express what were merely "opinions" in no way meant to be investment advice. but their position is institutionalized not only re the banks, but in the mandates of numerous pension funds, mutual funds, and so on, which are only allowed to own instruments with acceptable ratings.

i think that's what i said (the second part) ... but it goes beyong what they can own or invest in, it also drives capital and loss reserve requirements.

[don]

Re: S&P cuts U.S. ratings outlook to negative

from Automatic Earth:

The European Union is home to over 500 million people. Only 4.7 million of them live in Ireland. But they have still needed massive bail-outs from the EU, and will likely need more. Greece has 11.3 million inhabitants, Portugal 10.6 million. The former has been bailed out already, the latter has now officially applied to be next in line for a bail-out.

Another small nation, Finland, with 5.3 million people (barely more than 1% of the EU population), threatens to throw a big fat monkey wrench into all the works of Brussels finance. The True Finns party is slated for a major victory in today’s elections, they may even emerge the biggest party, and their campaign was based on no more bail-outs, period.

On Friday, Britain announced it wants no part of a new European emergency facility, the European Stability Mechanism, which is supposed to be ready by 2013. These developments will make it much harder to keep Europe together. And as long as Europe has no better answers to the financial crisis than the US has, i.e. mass transfers of public funds to failed banks, all of it facilitated by fraud accounting, why should any nation volunteer to participate in any of these schemes? Not one single common citizen will emerge any the wiser or better off from them. Quite the contrary.

In America, there is a very interesting video from Eric deCarbonnel, which very clearly shows the Federal Reserve executing fraudulent actions, in this particular case by selling put options on its own debt. The Automatic Earth staff writer Ashvin Pandurangi discusses deCarbonnel's findings. Ashvin also explains why he draws different conclusions from the material presented by deCarbonnel than does Tyler Durden at Zero Hedge.

Bailing Out The Thimble With The Titanic

Dr. Steve Keen, the ever-insightful Australian economist who runs the Debt Deflation website, wrote an excellent piece in March of 2009 entitled Bailing out the Titanic with a Thimble. It essentially argued that the U.S. government's fiscal stimulus and the Fed's liquidity injections would be wholly insufficient to restart growth in the private credit markets, and so far this analysis has been spot on.

Ilargi and Stoneleigh, who run The Automatic Earth, have also been preaching this same message for several years now, and have repeatedly stated that the U.S. dollar and Treasury market would be the beneficiaries of the debt deflationary trend. It was most recently repeated in Ilargi's latest post, Our Prosperity is Owed Back Plus Interest.

Yet, since late 2010, it would appear on the surface that long-term Treasury rates have been inching upwards and that commodity prices have been going through the roof. This superficial trend has led many commentators to "double down" on their predictions of a Treasury market collapse and imminent hyperinflation of the dollar.

Some people point to sustained oil price increases as evidence of their predictions, but, as mentioned before, that trend has been wholly discredited as a byproduct of actual monetary inflation. It is merely a result of the Fed exporting speculative debt to investors worldwide, who fully take advantage of the "speculative" part by betting on increases in the prices of equities and commodities.

Other people have been focusing more on the Treasury market aspect, pointing to Pimco's net short position on U.S. Treasuries and the brief trend of rate increases as evidence of imminent chaos in the market. Of course, they can also point to the fact that the federal government is running record deficits to allegedly support the private economy, with no real end in sight.

As The Automatic Earth has repeatedly cautioned, however, what matters most right now are the systemic dynamics of deterioration in private finances and social mood, rather than the fundamentally unsustainable nature of deficit spending. A major component of these dynamics is the monetary objectives and policies that will be undertaken by the financial elites through their proxy, the Federal Reserve.

Last week I wrote two pieces regarding this component, Jumping the Treasury Shark and Bill Gross: Master of Monetary Psy-Ops, and, specifically, about why the elites desperately want to maintain stability in the Treasury market, and how Pimco's sharp reduction in Treasury exposure is most likely not a long-term bet against the market.

Today, we get a dose of healthy confirmation through a video report by Eric deCarbonnel at Market Skeptics, entitled:

FRAUD: Federal Reserve Is Selling Put Options On Treasury Bonds To Drive Down Yields:

It is featured in a Tyler Durden piece on Zero Hedge named Doubling Down To (DXY) Zero: Has The Fed, In Its Stealthy Synthetic Bet To Keep Long-Term Yields Low, Become The Next AIG? In essence, it reveals some strong evidence to suggest that the Federal Reserve is already, or is actively considering selling large amounts of protection against Treasury rate increases (Put Options) to various investors as a means of controlling the long end of the Treasury curve (which, as per deCarbonnel, is illegal). Indeed, the Fed actually used this shell tactic back in 2000, as explained by Vince Reinhart, who was Fed secretary and economist at the time [1]:

The System has also been willing to put its balance sheet at risk to encourage appropriate expectations about interest rates or to calm fears about funds availability. As plotted at the top right, the Desk sold options on RPs for the weeks around the century date change that totaled nearly $0.5 trillion of notional value. Given that the Desk already operates in all segments of the Treasury market, we wouldn’t have to move up a learning curve if instructed to increase purchases of longer-dated issues.

We find out that there is, in fact, no need for the Fed to "move up the learning curve", step up its game and scale up the walls of the Treasury curve with multiple trillions worth of gross sales of interest rate swaptions. That essentially means that there is no desire on the part of financial elites to let long-term rates rise significantly or to let the Treasury market destabilize, and, on top of that, they are in the process of leveraging themselves to the point of absolutely no return.

The question then arises, however, of whether they will actually be successful in "pinning" long-term rates for a few years, or whether "Operation Swaption" is a time bomb set to detonate within the next year, when rates significantly increase in response to sovereign default and/or inflation concerns.

The analysis from Zero Hedge would suggest that the latter is a very likely possibility, as implied in the article's title. Tyler Durden suggests that the Fed may be the next AIG, except without anyone big enough waiting in background to bail them out of their misery:

Alas, that [the Fed's printing press] will have no impact whatsoever, if indeed the Fed has been reduced to finding ever fewer counterparties to a synthetic bet to keep long-term rates low, as very soon, with inflation ticking up, all hell may break loose in an identical replay of what happened to AIG once the Fed's put is called against it. [2].

Durden is making the assumption that there will be ever-fewer incremental buyers of Treasury bonds, and therefore fewer investors that would want to hedge their Treasury exposure by buying protection from whichever primary dealer bank (most likely JP Morgan) is acting as a front for the Fed. He is also assuming that inflation will "tick up" very soon, causing rates to increase and forcing the Fed to make good on their massive bets, which they simply cannot do, because it would expose them as being the underlying counter-party to the trade. Indeed, that would most likely trigger a self-reinforcing dumping of Treasury bonds and a set of events that would ultimately result in a full-blown currency crisis.

There are two major flaws that I perceive in these assumptions, however, with the first being that rising prices (what he calls "price inflation"), primarily for energy and food, will continue increasing as it has been over the last year or so. This argument has been addressed and largely discredited numerous times by The Automatic Earth, and even Zero Hedge itself has suggested, back in February, that the exact opposite may occur in the short-term.

This occurred in an article that was the focal point of a piece I wrote shortly after it was published, Exporting Speculative Debt. The Zero Hedge piece contained the following argument regarding a peak in total margin debt used by hedge funds, and the lowest level of free cash since 2007, when the latest credit bubble also peaked:

At ($45.9 billion) this number is just below the ($52.8) billion last seen just before the August 2007 quant wipe out which blew up Goldman's quant desk, and arguably was the catalyst for the beginning of the end. In other words, as we have shown, everyone is now purchasing on margin and the level of investor net worth is the lowest in over 3 years. Which means that should the market decline from this week persist and the Fed be unable to stop it, the margin calls will start coming in fast and furious, and unwinds in otherwise stable products like gold and silver are increasingly possible as hedge funds proceed to outright liquidations. [3].

That leads us to the second assumption, that the Fed will not be able to "pin" down long bond rates because there will not be enough incremental buyers of Treasuries seeking to also hedge their exposure. When global equity and commodity markets begin their downward cascade in response to the ongoing debt deflation and a temporary end to quantitative easing, margin calls will indeed be coming in fast enough to make your portfolio spin. The demand by institutional investors for a "safe haven" will emerge as quickly as the daylight descends into pitch black, and it will then become clear that the intent was never to bail out the Titanic with a thimble, but the other way around.

The bond markets of Japan and Europe simply can't make the grade, and, as referenced in Jumping the Treasury Shark, there really isn't enough gold to soak up all of that capital. Instead, the U.S. dollar and Treasury bond, because of their fundamental weakness, will be the refuge of choice and design, and this will also serve to aid the Fed's Mafioso protection scheme for controlling rates. The world has been flooded with dollar-denominated debt for decades, right up until now, and soon all of those liabilities will come pounding on the front door. And who will answer? Why, the Fed and the financial elites, of course.

They will invite the debt deflation in with open arms, because now they are holding vast sums of cash, and Treasury bonds that simply cannot go bad. It will simultaneously be used as a justification for "gradual" austerity measures targeted at the middle and lower classes, as the public deficit will remain elevated to finance further bailouts of the financial elite class and brutal military operations for resources. The insidious shell game and unprecedented transfer of wealth will continue on, at least for some significant period of time, before the fires set by the elites burn out of control and finally engulf them.

http://theautomaticearth.blogspot.co...ce=patrick.net

[jk]

Re: S&P cuts U.S. ratings outlook to negative

selling naked puts is no different than buying the underlying security and selling a covered call on it. we've been saying around here for years that the fed, if necessary, would move its purchases of treasury instruments out the yield curve. bernanke said so very explicitly in his "making sure 'it' doesn't happen here" speech. where's the news here?

[flintlock]

Re: S&P cuts U.S. ratings outlook to negative

Virtually no one -- be they homeowners, financial institutions, rating agencies, regulators, or investors -- anticipated what is occurring.

That's too funny. I remember my neighbor, a mortgage banker, casually telling me about what liars the rating agencies were, back in early 2007! If I was hearing about this at a backyard bbq, I'd imagine a few others were wise to it.

[LorenS]

Re: S&P cuts U.S. ratings outlook to negative

I wouldn't give a ratings company the time of day anymore. They're obviously worthless - at least to the retail investor.

Ben Jones, who runs the housing bubble blog kept an archive so that this "no one knew" crap could be proven wrong.

http://thehousingbubbleblog.com/index.html

I used to read this blog a lot. I was one of the ones who made the preposterous statement that the Fed could start buying mortgages if the market got too congested or if MBS looked like they were failing. Who could have known?

[ASH]

Re: S&P cuts U.S. ratings outlook to negative

Attitudes toward this announcement seem a little schizophrenic. On the one hand, the various rating agencies were proven incompetent by the recent financial crisis, and many (including myself) think they are morally culpable for that crisis as well. It seems like we're taking this news item as an opportunity to vent about the rating agencies, just because S&P reminded us that they're still in business. On the other hand, S&P is saying something about America's finances that is perfectly reasonable, and very much in line with our analysis here.

[dcarrigg]

Re: S&P cuts U.S. ratings outlook to negative

Attitudes toward this announcement seem a little schizophrenic. On the one hand, the various rating agencies were proven incompetent by the recent financial crisis, and many (including myself) think they are morally culpable for that crisis as well. It seems like we're taking this news item as an opportunity to vent about the rating agencies, just because S&P reminded us that they're still in business. On the other hand, S&P is saying something about America's finances that is perfectly reasonable, and very much in line with our analysis here.

I suppose I should clarify what I'm on about in this thread then, because as we all know, it is easy to make logical leaps in one's own head without showing the steps.

1. S&P does things (likely criminal) that we vent about
   
2. These things enrich the financial oligarchs and by-proxy S&P
   
3. There is no objective quantifiable basis for these ratings; the preceding two items support this conclusion; Do you really believe that the U.S. is a riskier investment over 30 years than the goofball channel islands they hand AAA ratings to? But channel islands are their tax havens so...
   
4. Oligarchs get bailed out; S&P take no blame and makes lame statement avoiding culpability; Hides behind numbers
   
5. S&P uses political budget impasse as a political opportunity to tell the middle class they must pare back entitlement programs and accept austerity (see Hudson for parallel examples around the world); Arrives 4 days after senate report points the finger directly at ratings agencies as a fundamental part of the economic crisis; manipulates markets; attempts to manipulate congress
   
6. The majority of the American people are on the loosing side (again)

If their report pointed to route causes and didn't just point at the budget impasse and call for paring back entitlements it would be one thing. See, the Fed blowing money they like is fine. Inflation eating returns is fine. An 80 year old getting a smal check and a check-up is a problem.

It is one thing to point at entitlements as part of a problem. It is another to come at it one-sided. All cuts, no revenues. It reeks of politics.

Just look how it describes the 'positive' British austerity. It doesn't even mention that 50% tax bracket they tied the wealthy up in to do it. Just the cuts. It just wants cuts. Remember who this debt is owed to. Cui Bono?

[jneal3]

Re: S&P cuts U.S. ratings outlook to negative

Aside from the fact that this isn't really news to this site, doesn't anyone feel at least a tinge of sadness? Putting a (dubiously credible) official stamp on the finances of the nation that I grew up in crosses an emotional line, like a stain. So what if we miraculously bring this lost situation back from the brink; my kids will not know the nation I knew, a nation where such a thing as a 'negative outlook' on the creditworthiness of the government was simply not conceivable. This changes nothing, but also everything.

[DRumsfeld2000]

Re: S&P cuts U.S. ratings outlook to negative

I think that you are right ASH. The anouncement was probably made with the agreement of certain individuals to put pressure on the politicians. However, Pandoras box has now been opened. If the politicains do nothing then the S&P et al will have to reduce the US credit rating in due course. A line in the sand has been drawn and this means something in my opinion.

[lektrode]

Re: S&P cuts U.S. ratings outlook to negative

Is anyone else impressed with the balls of these ratings agencies?

1. Ratings agencies, S&P included, knew that mortgage backed securities were junk, but rated them AAA. Full report here. (see pg. 6)
2. Ratings agencies refuse to admit blame as U.S. Gov. bails the screwed up system out
3. Ratings agencies threaten to downgrade U.S. Gov.

That's balls. Moreover, it threatens national security. It is financial terrorism.

agreed!

gotta wonder just whom is covering for them _now_ ?

[lektrode]

Re: S&P cuts U.S. ratings outlook to negative

From my view, this is just a tactical move to ratchet up the 'emergency' to squeeze through entitlement cuts.

After all, you have to have the system be threatened in order to save it via giving emergency powers to banksters...again.

which congressional commts will have oversight in this, assuming it goes down?

[big67]

Re: S&P cuts U.S. ratings outlook to negative

The S&P move is not unespected to anyone here: US deficit is at red alert levels since years now.

Euro is up again today versus dollar... after Greece, Ireland and Portugal, more bad news on Greece.... 3 month greek debt sold today at more than 4% interest?! Euro should be 0.5 on the dollar by now, not 1.43 !

Moreover Gold is just at the same level as months ago, in euro terms. So... is it really gold that is strong, or the dollar that is weakening more and more?

Is a dollar crisis in the making?

[big67]

Re: S&P cuts U.S. ratings outlook to negative

hmmmm... americans still in denial about the coming dollar crisis?

[unlucky]

Re: S&P cuts U.S. ratings outlook to negative

hmmmm... americans still in denial about the coming dollar crisis?

Worth noting that when the agencies started down-grading Ireland and Greece, the authorities and many of the population reacted the same way, i.e. "these guys don't know what they're talking about". In fact, with hindsight, it's clear that Ireland and Greece were already beyond the point of no return when the agencies started downgrading them. I'm not sure that's true for the US. The US is on a road to crisis but could probably still turn around if the authorities had the will. Unfortunately it's becoming clear that the only thing strong enough to turn them around will be a full blown crisis, ergo crisis is assured. The fact that so many in the mainstream world are already downplaying the S&P warning merely confirms this observation.

[big67]

Re: S&P cuts U.S. ratings outlook to negative

Worth noting that when the agencies started down-grading Ireland and Greece, the authorities and many of the population reacted the same way, i.e. "these guys don't know what they're talking about". In fact, with hindsight, it's clear that Ireland and Greece were already beyond the point of no return when the agencies started downgrading them. I'm not sure that's true for the US. The US is on a road to crisis but could probably still turn around if the authorities had the will. Unfortunately it's becoming clear that the only thing strong enough to turn them around will be a full blown crisis, ergo crisis is assured. The fact that so many in the mainstream world are already downplaying the S&P warning merely confirms this observation.

I agree about Greece, it was probably doomed from the start, too much deficit (13%+), cooked books, a huge amount of reforms to push forward, and so forth...

About Ireland, I would not say so, probably the government acted foolishly taking bank debt on the state balance sheet.

I disagree about USA still able to turn around the situation. Did not do the math, but looking at the numbers I feel the time to act for USA is passed by, probably last year or a couple of years ago. Reforms take years to produce results, and the dynamic of debt is unforgiving.

Greece is a posterchild: they cut, GDP went down, so they cut again, GDP down again, and so on... till government exausts voters patience and/or market support.