For the first time ever the U.S credit rating was downgraded by Standard & Poors. It seems that the political impasse in Washington has acted as a spotlight, on our growing debt problem, to the rest of the world. Regardless of the fact that the Hill managed to raise the debt ceiling last week, the damage has been done.
But who is to blame? The GOP? You, Me, Us? Should this downgrade and the losses in the market last week really come as any surprise?
In my opinion, it really should not be a surprise. If you’ve been paying any attention since 2008, you would have noticed the non-correlation between the markets and economic growth in the United States. It makes no sense to have a market that gives 20% returns in a so called “recovery”, while unemployment numbers, housing numbers, consumer confidence and manufacturing continue to stall or decline.
Some blame this non-correlation on a monetary policy called quantitative easing (if you don’t know what this is, you should), others blame it on a lack of consumer spending. Regardless of who you blame, it doesn’t…or shouldn’t take a Ph.D. in economics to understand that a skyrocketing market in the midst of an economic recovery is NOT sustainable if other indicators do not catch up.
(FOOTNOTE): Historically, it is normal to see big returns after a market decline…HOWEVER, in order to keep those returns we must also see a continued recovery in other areas (e.g. housing, manufacturing, unemployment, etc.).
So now what? Well, your guess is as good as mine. However, if I were to pull out my crystal ball and make a prediction….I’d probably put a 50k Short position on U.S. T-Bills when the market opens on Monday and then I’d probably be a millionaire by days end.
But I don’t have 50k….so I guess I’ll take some cheese with my hamburger please.
P.S. China Blasts U.S. Over Credit Rating Downgrade
Nice post, Candace. Excellent reference to the non-correlation between growth and markets. I wouldn’t be shorting the T-Bills, though. Chances are good that people will be pulling out of risk as a result, and despite the downgrade, US bills are still considered a safe haven. Sadly, they might actually go up. Keep up the awesome work! You’re getting an awesome from me. If you haven’t already check out my analysis of the US Debt Debate at http://thesaturdaysyndicate.com/2011/07/28/us-debt-ceiling-debate/
Barry – You may be right. Futures are showing yields down and a rush to treasuries. Hmmm. Another non-correlation?
This might actually be a proper correlation between growth and markets! When the economy is tanking, people rush to safe havens. With very little growth, one would expect a growing bond market. Just a long-overdue adjustment to reality (post-Quantitative Easing). I think the market still needs to drop another thou or two before we’re ready to move forward again.