United States Loses AAA Credit Rating

Standard and Poors, a once-excellent bond rating agency that now largely ignores economics and instead reflects market sentiment, downgraded the US to a AA+ rating this week. After holding back a big yawn, I took another sip of coffee and went to get a danish.

The Economist magazine said it best (with complete lack of emotion) a few weeks ago: "America's net indebtedness is a perfectly affordable 65% of GDP...the current problems, rather, are political." Yet, this reality has not stopped pundits and game-playing politicians from making it seem like America will go bankrupt tomorrow.

After the US Treasury pointed out that S&P had miscalculated by a couple of trillion dollars while making its decision, S&P responded that they have decided to maintain the downgrade anyway.

Ratings changes are great for business. S&P’s well-timed downgrade will give stockbrokers around the world a fantastic excuse to call their already-flustered clients on Monday to solicit new trades.

Panic and churn!

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Churn (verb):

1) Agitate milk or cream in order to produce butter.
2) Excess trading of a client’s account in order to increase broker’s commissions.

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"If anything, it may change my opinion on S&P."

Warren Buffett, when asked if S&P's debt downgrade will change his opinion about U.S. treasuries.

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The Market Gets Ugly

Today’s market drop of almost 5% will make front-page headlines tomorrow, and retail investors (who seldom read business news) will not take it well.

It’s not that people are panicking (yet) so much as giving up. Faced with debt ceiling debate stress, the prospect of defaults in Europe and slowdowns in China, they are simply packing it in. They are saying, “enough of this,” and selling.

It all started last Thursday, when investors began moving out of US stocks (or US anything) due to the uncertainty of the debt ceiling. For almost a week, news viewers were inundated with stories about "unpayable debt" and "market uncertainty." And, once uncertainty takes hold, it is ravenous.

For the unexceptional investor, not knowing whether or not something terrible will happen is even worse than knowing that something terrible will happen.

Just a few days ago I viewed the market drop as an unnecessary annoyance, caused by a few idiots in Congress. Now that the drop is significant, however, this is looking more and more like an opportunity (or a rout, depending upon your financial preparedness).

I plan to mix myself a rum and Coke, and have fun watching the lemmings sell their stocks for less then they are worth, out of fear. There is now enough negativity in the market to assure at least several days of rollercoaster rallies and dives.

In the following months, junior precious metal miners like Nevsun Resources (NSU) and Great Western Minerals Group (GWG) should profit well from the uncertainty. Leper stocks, such as Bank of America (BAC) and Barclays (BCS) are already great bargains, and may get even cheaper.

Stay away from the overbought stocks that retail brokers have been recommending for weeks: precious metal ETFs, tech stocks, emerging markets (ex. China and India), and Canadian banks.

Be aware that this could get ugly before it gets better. Keep your head.

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"I see no reason why 1931 should not be an extremely good year."

Alfred P. Sloan Jr. of General Motors, 1930

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Disclosure

Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.
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The Debt Ceiling Hurt Locker

and the triumph of founding fatherism




The debt ceiling was raised, the crisis averted.

So why did the stock market go down again? Wasn’t there supposed to be a rally?

You may recall the award-winning movie from 2008, The Hurt Locker, in which a US soldier disarms bombs in Iraq. For the enemy combatants, blowing up innocent civilians was acceptable so long as it furthered their goals. I mention all this because it seems eerily similar to what we all witnessed in Congress last week.

Tea party members actually said – publicly - that they were willing to let the US default on its debt if it led to reforms later. That is, they were perfectly willing to detonate an economic bomb in order to reach their long-term objective (which, ironically, was to save the economy). Sane members of congress, despite universally despising the bill, passed it only because self-destruction was worse.

Both Republicans and Democrats swallowed bitter amounts of compromise to get the job done over the weekend, which was admirable. Despite this, rightist media is still calling the President a “Marxist thug” and “Nation Destroyer,” along with the usual racial slurs (ex. “leader with swollen lips.”)

Some of the tea party's ideas are actually good, though most members probably don't realize why. For example, Keynesian spending (to improve the economy) doesn’t work if everyone is worried about the country spending too much and defaulting on its debt; in this case, fiscal conservatism is better. It’s not the tea party’s economic ideas as much as their methods which are concerning.

The stock market continues to drop because people around the world increasingly regard the US as fanatical. The nation’s cult religion, “founding fatherism,” is growing faster than Falun Gong.

Many believe that because of fringe groups, the United States simply can’t be trusted.

Can it?

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(about the civil war in Cuba)

Michael Corleone: "I saw a strange thing today. Some rebels were being arrested. One of them pulled the pin on a grenade. He took himself and the captain of the command with him. Now, soldiers are paid to fight; the rebels aren't."
Hyman Roth: "What does that tell you?"
Michael Corleone: "It means they could win."

From the movie, The Godfather, Part II

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