FLASH REPORT: US Downgrade
August 8, 2011
 iven the increasingly dysfunctional politics
in Washington, Friday’s downgrade of the
United States’ debt rating is not surprising, even
if the timing was. After so badly missing the problems
in the securitization market, ratings agencies
are eager to regain credibility, especially with
Asian clients who have publically fretted about
US budget deficits for years. The market reaction
on Monday morning has been predictable; selling
all risk assets with the exception of gold.
What does the downgrade of the US mean
for the future? No one knows with any certainty,
but a few facts have come to light.
1) Emerging markets have become increasingly
important given their role of net
lenders. China’s role in calming global
financial markets is now paramount. The
Chinese have been reluctant to take a
leadership role in global events. They no
longer have that option.
2) China’s transition to a more domestically
driven, less import sensitive economy
is increasingly urgent. This can be
accomplished easily in the short term by
increasing infrastructure spending. However,
for long term success the Chinese
need to increase consumer spending, a
far more difficult task.
3) Among the major developed world currencies,
the US dollar still represents the
best house on a bad street. Given actions
taken over the weekend by the European
Central Bank to shore up Spanish and
Italian bonds, further downgrades across
the Eurozone appear likely.
4) Hard assets remain attractive even as the
global economy slows due to increased
inflationary expectations. Despite a
major correction in global equity markets,
copper remains over $4/lb and oil
in Europe is over $100/bbl.
5) Non-financial corporations globally are
incredibly healthy, due in part to their
unwillingness to expand operations.
Depending upon the company in question,
corporate debt may be just as attractive
as government bonds.
Of course, the global financial condition is
extremely fluid and likely to change. No one
truly knows what will happen over the coming
days as the financial markets find themselves in
terra incognito. |
