In case if you were betting that Europe will be fixed over the weekend… the headline says it all. Friday’s “breakout” in stocks could be a head-fake. Via Telegraph.

Just when the eurozone governments thought it could not get worse for Europe’s single currency, it did.

Shell-shocked EU finance ministers meeting in Brussels on Saturday were already reeling from the worst Franco-German rift for over 20 years and a fractious failure to resolve the problems that have brought Greece, and the euro, close to the brink.

But then a new bombshell hit as a joint report by the EU and the International Monetary Fund (IMF) warned that, without a default, the Greek debt crisis alone could swallow the eurozone’s entire €440 billion bailout fund -- leaving nothing to spare to help the affected banks of Italy, Spain or France.

An EU already rocked by divisions between France and Germany over how to increase the “firepower” of the European Financial Stability Facility (EFSF) in order to save the wider eurozone from Greek contagion now faced the prospect of losing it all in one go.

As dark-suited finance ministers contemplated the pains au chocolat laid out on their desks alongside their talking points and position papers, Jan Kees de Jager, the Dutch finance minister, told colleagues: “We’ve got to get real. People are talking about new defences but with one gulp the whole €440 billion could be gone, leaving the eurozone with no protection at all.”

….

Compounding the trauma, Christine Lagarde, the French finance minister turned IMF chief -- and one of the few key players who appeared to be enjoying herself in her new headmistress-like role -- issued a grim warning to her former European peers.

The IMF would no longer be willing to pick up a third of the total bill for rescuing Greece, a contribution worth €73 billion, unless European banks were prepared to write off 50 per cent of Greek debt.

“It was grim. The worst mood I have ever seen, a complete mess,” said one eurozone finance minister.

Related posts:

1. Greek Austerity Now: Bankster Cartel’s Another Victory Over the People
2. Give the Banks What they Want, or there Will be “Tanks In The Streets, Mass Suicides”
3. Barry Ritholtz: Not the Greeks, But Their Creditors Get Bailed Out

It is possible the many people have never heard of this Belgian Bank until recently. Even if you haven’t heard about it until you stumbled upon to this article, you can be forgiven. At the outset, this appears to be a complicated story. Or at least the apologists of the banking crime syndicate will tell you that this is a very complicated case and the average public doesn’t have the IQ necessary to understand all the complexities of international finance. Thus, they argue, that it is best that the story is kept under the rug.

Back in Dec 2008, when the financial world is rattled by the implosion of the banks, the US Federal Reserve Board came to the rescue of the banking cartel by providing unprecedented access to its discount window. The Feds charged a nominal 0.5% (nominal = per year) interest rate for these loans issued to the banks. The Feds served its intended purpose -- that is well and good. However, the size of the loans issued was a jaw dropping

In a legal battle that can be comparable to investigative journalism of Woodward and Bernstein on the Watergate scandal, Bloomberg fought the US Federal Reserve to obtain the list of banks that received this massive $1 trillion loans. After prevailing in the 2+ years of battle with the Feds, on March 31, 2011 -- Bloomberg disclosed the list of the banks that took the assistance who publicly asserted that they didn’t need any help from anybody. At the top of the list was Dexia, a relatively unheard of Belgina bank. (Bloomberg: Dexia Drew Most From Discount Window in Record Week in 2008)

Dexia SA (DEXB), the largest lender to local governments in Belgium, borrowed more than any other bank from the U.S. Federal Reserve’s discount window during the week in October 2008 when use of the program surged to a record.

Dexia borrowed $31.5 billion on Oct. 24 of that year through its New York branch, according to Fed documents released today in response to a Freedom of Information Act request. Total borrowing from all banks using the discount window was $111 billion on Oct. 29, the record weekly total, according to previously released data. Dexia had an outstanding balance of $26.5 billion on that day.

Dexia, based in Brussels and Paris, and foreign banks including Dublin-based Depfa Bank Plc and Bank of Scotland Plc dominated the list of borrowers from the U.S. central bank’s last-resort lending program as markets seized up following Lehman Brothers Holdings Inc.’s failure. The discount window, established in 1914, is the Fed’s primary program for providing cash to banks to help them avert a liquidity squeeze.

“When the perfect storm hits, you find out who’s prepared and who wasn’t,” said Vincent Reinhart, the Federal Reserve’s director of monetary affairs from 2001 to 2007. “Borrowing from the Fed is evidence of a lack of preparedness.”

Dexia’s outstanding balance at the Fed has been reduced to zero, Ulrike Pommee, a spokeswoman for Dexia, said in an e-mail.

“This information is backward-looking,” she said. “We experienced a great deal of tension concerning the liquidity of the dollar at the time of the crisis. The Fed played its role as central banker, providing liquidity to banks that needed it.”

The foreign banks took advantage of Fed lending programs even as their host countries moved to prop them up or orchestrate takeovers.

Dexia received billions of euros in capital and funding guarantees from France, Belgium and Luxembourg during the credit crunch.

Note the emphasized text. The bank’s spokeswoman said that in March! Backward looking? OK, then -- let’s fast forward to May 2011.  Let us see what other savvy observers found out. On May 25, 2011 -- Tyler Durden of Zero Hedge said this:

About a month ago Belgium’s biggest bank (Dexia), and as is now well known one of the most active borrowers at the Fed’s discount window in the days following the Lehman crisis, issued €3.2 billion in FRNs with a two year maturity that had an odd feature: an ultra short term put feature (as the Bloomberg screen shows below, puttable June 26, 2011 at par) which can be exercised up to 33 days ahead of the put day (underwritten by Barclays, Citi and MS) or in other words, today. Well, as our source has told us, following recent downgrades of virtually all banks with Greek exposure (a topic further pursed by the below IFR article), the two largest investors in the bond: Blackrock, which owns the bulk or about €2.6 billion, and Barclays (among others) have exercised their put option. The speculation is that “either someone knows something or had a very rapid change of heart” and concludes that “this should make the whole funding thing relevant again” especially since banks continue to rely on the ECB exclusively for short-term liquidity needs.

Let’s fast forward to the last two weeks of events (last week of Sept and 1st week of Oct, 2011) on international financial news. Dexia is done. Kaput! The trading in this stock was halted. (Note a irony here. One of “the best and the brightest” analysts at Goldman Sachs removed Dexia from his list of Pan Europen banking stocks soon after the carnage. God bless the clients of Goldman Sachs. We all know that the clients and the public pensions are the prey for Goldman Sachs.)

While I indulge you in the quest for knowing what the hell is happening, may I also alert you to some articles, which qualify to be in the humor category?:

• Pretty much after every rat left the sinking ship, Moody’s steps in to lighten the mood -- by downgrading Dexia. Yes, you can’t make this stuff up. You would think that these high paid a***les at the rating agencies should do their job BEFORE such collapse, right?  When is the last time it happened that way?
• Zero Hedge with a humorous title: S&P Says Dexia Failure May Be A Bad Thing. The first line is priceless: Well, not quite the discovery of aquatic wetness but close enough.
• There are more, but what’s the point? The bottomline is, Dexia is done. Stick a fork in it.

Here is my frustration with this whole thing:

• How come the self proclaimed “best and the brightest” always appear to get it wrong? Is it Hubris? Or, is it plain old trickery and deception?
• Did the US Federal Reserve is an accessory to the banking crime syndicate by extending discount window to non-viable and perhaps criminally negligent banks like Dexia?
• In relative term, Dexia is a small bank. If implosion of Dexia can cause this much carnage, what will happen when some of the major European banks, especially French banks begin to implode?
• Speaking of French Banks, what will happen when a major US investment bank Morgan Stanley, which has a lot of exposure to the imploding French Banks, begins to implode?

Ladies and gentlemen. We all should be very scared. I strongly believe that this time it is nearly impossible for the US Federal Reserve or the US Treasury to stop the carnage. I sincerely hope that I am wrong. But, if I am right, God help the economy, our jobs etc.

Related posts:

1. Hacker Anonymous to Release Damaging Info on Bank of America
2. Good Read – Nasim Taleb “The Great Bank Robbery”
3. One of Many Different Faces of Fraud (The “Healthy” Bank)

Remember this Vanity Fair article: Of the 1%, by the 1% for the 1%? Professor Joseph Stiglitz was at the “Occupy Wall Street” rally and appeared on Lawrence O’Donnel’s show.

“Too little regulation of banks and too much regulation of the democratic processes.”

Well said, professor!

(I don’t agree with everything he said). Watch the interview.

.

Visit msnbc.com for breaking news, world news, and news about the economy

Related posts:

1. Movie ticket prices: Regulation versus Free Markets
2. Ratigan: “The Greatest Con Job” (Must Watch)
3. Is a regulation-free market practical ? A discussion

Senator Dick Durbin said something very very irresponsible on the Senate floor. He encouraged a run on Bank of America!

Does he even understand the consequence of his idiocy? Back in Spring of 2008, Senator Chuck Shumer encouraged a run on the Indy Mac bank and within days the bank collapsed.

Folks, it is one thing for ordinary people to say to move your deposits from one back to the other, and quite another for an elected official like a US Senator to say it. It is utterly irresponsible on Durbin’s part.

———————-  End update———-

If you are a Bank of America customer and used their online services, you would have seen this screen for the last 3 days.

Oct 4, 2011: Bank of America website is down for 3 days in a row

It didn’t matter much to people if B of A’s mortgage division, or brokerage division is accused of committing fraud to the tune of  100s of billions of dollars. But, ever since BoA announced a $5/month debit card charge, customers are very unhappy. I talked to a few people who have their account with B of A. They are so unhappy that they want to move their account to a local bank. I don’t blame them. But, I did not anticipate this much anger over this fee. How mad are people about this fee? Mad enough to cause a run on the bank? For God sake, I hope this report is just an isolated incident.

From what we can gather, according to eye witness testimony, St. Louis PD has barricaded the Bank of America building and is refusing customer access to deposits.

Just pray that this is an isolated incident and not the beginning of a bank run. If it is the beginning of a bank run, God help the USA and the world’s financial system.

Related posts:

1. Financial Market Update (Red Alert): Short-Term Yields Going Negative
2. Markets Sell off Today, Still Wall Street Wins
3. Afternoon Update: 2011-08-15

So far, this week (especially yesterday) we have seen some of the craziest movements in stock prices around the world. To me this is indicating a lot of trouble ahead.

FT Alphaville: All is not well in the kingdom of Stanley

All is not well in the kingdom of Stanley. The CDS spreads have blown out and the market is concerned. Very, very concerned. Moody’s Analytics is here to tell us all about why that is.

The first [concern] is the exposure of MS to European institutions and the second is the level of trading revenues in the third quarter. MS reported in its second quarter earnings call that net exposure to the GIIPS countries was $5 billion on a gross and $2 billion on a net basis. However, some sources have recently focused on their FFIEC1 reported gross exposures of $39 billion to French banks, which we believe overstates their actual risks significantly.

Two weeks ago I mentioned on MMGL that one of the least talked about, but much concerning news is the break in Hong Kong’ Hang Seng stock index, which is down another 2.3% today to 17592 (down 30% from a peak of 24988 set in early 2011).

It is a reflection of troubles in China’s economy. Sorry Farid Zacharia, you haven’t done your homework -- like most of the western economies, China is also doomed. This is a case of (crony) capitalism and socialism (ironically, socialism with a market economy) going bust simultaneously. From Zer0 Hedge:

This is an emergency announcement for bubble watchers: China CDS has soared to 194.5 bps, +14.5 in the past few hours (a trend first noted here about a week earlier), the biggest relative mover in the sovereign realm, which has just hit the widest it has been since March 2009.

These two items are enough for us to be concerned. Very concerned. A financial tsunami is coming our way. Be prepared!

Banks hurried to leave the TARP program early so that they can pay their execs as much as they wanted. Why doesn’t this surprise me? (Via Huffingtonpost):

In the wake of the financial crisis, a number of the nation’s largest banks were excused from the government’s rescue program before they had returned to a position of complete financial security — in part because they wanted to avoid restrictions on how much their executives would get paid, according to a new report from the program’s government overseer.

Citigroup, Wells Fargo, PNC and Bank of America successfully lobbied to leave the federal bailout program early in 2009, even though the Federal Reserve Board and the Federal Deposit Insurance Corporation had recommended they take additional steps to shore up their assets, according to a new report from the Special Inspector General for the Troubled Relief Asset Program, a government watchdog office.

Related posts:

1. Morning Update: 2011-08-10
2. Fraudclosure Gate Update: Sheila Bair
3. Morning Update (Aug 25, 2011): Bank of America is Hungry for Capital. Heads for Buffet

The golden period of economic growth in the US economy. During that time, the financial sector played its rightful role. What is the role of the financial sector in the economy? It is to support the real economy (manufacture of goods, sales and service):

• by mobilizing savings
• by allocating those saving to help the economy grow
• by serving an insurance function -- spreading and pooling risk
• in helping you save when you are young and spend it down when they are old

The modern day finance sector is anything but all these. It is dominated by speculation and gambling, predatory lending, outright stealing, money laundering, political hacking -- in short, socially predatory.

Here is a good Interview at INET. The synopsis.

We all know it: The financial sector is bloated and banks are too big to fail. But just how bloated is it, and how much should it be shrunk? Gerald Epstein and his collaborator James Crotty use both micro and macro data to deliver the numbers. They build on James Tobin’s concept of functional efficiency to separate the financial sector’s beneficial activities (mobilizing savings, financing investment, and reducing risk) from its socially inefficient activities (gambling, and distorting the political process). An empirical study that is full of institutional detail and addresses the elephant in the room: big banks and regulatory capture — this is new economic thinking.

Quotes from the interview:

• “When finance is getting too big, too powerful, too destructive, it can actually lead to financial instability”
• “50% of Goldman Sach’s revenues come from trading (gambling)”

Sure -- this guy is an academician. For that very reason, some financiers will try to discredit his as being an academic who is out of touch with reality. That would be the same financiers who would brag about their own academic credentials and pedigree -- i.e. where they got their MBAs from.

Related posts:

1. The Rush for MBA Finance
2. Do Leeches Produce Blood?
3. Economics: “A Disgraced Profession”

Related posts:

1. All About Europe’s Sovereign Debt Crisis in One Picture
2. S & P Downgrades US Debt. Now What?
3. Move Over the Republics of Europe, Your New Masters are…..

Quotes from the interview:

You don’t need the Fed to tell you that something is wrong.

…at least this time around, Mr. Bernanke did the right thing [...and...] what they said yesterday is better than what they’ve said for the last 12 years.

…if the S&P drops to around 900-950, we’ll get QE3 for sure…

I’m not selling my gold because I think in the long run, they will print money

I don’t know anyone who owns Greek bonds. But who owns them? The ECB and European banks.

The banks, the problem is that they’re not run as banks where they have a fiduciary duty…They take the capital and go and gamble left, right and center.

They should default.

The Greek people in Greece, the only way for them to survive economically, half way decently is to leave the EU.

…countries like Greece and probably Portugal will leave the EU, or the strong countries like Germany will leave the EU and then there’ll be dual

You can also also listen to the interview snippets in the audio below (intro in Telugu).

Related posts:

1. Give the Banks What they Want, or there Will be “Tanks In The Streets, Mass Suicides”
2. Mark Faber: If US Were a Corporation, its Bonds Would be Junk
3. Greece Bailout

It essentially says this: There has been a steep rise in net borrowing against credit cards after the previous recessions. This time it is very different.

Related posts:

1. How Much Does Canceling Credit Cards Affect Your Credit Score?
2. What Do Credit Card Numbers Mean?
3. The Real Reason for Economic Drag: Huge Drop in Consumer Spending

A lot of debate currently going on reducing the deficit and it is being shown as a problem that is orthogonal to economic growth, which is not true. Why can’t those thinking this way get the point that economic and employment growth can reduce the deficits and not the other way which is reducing deficits will increase economic growth! When you bring lot of people to work and bring them into taxable populace, so the deficits should go down. It doesn’t need Harvard level economists to grasp this(even though I posted a discussion which has one of them )! What has enabled countries like China, Brazil and India to show growth even the worst times of turmoil in the west (granted they could be bubbles too, but I think they have the population to absorb the bubble better by expanding the consumerism in house,  than here in US I bet, if they are smart enough to do that) ? Did they reduce the deficits as a first step? I can’t recall that.

Watch the interesting discussion how the economic growth is possible here in US too by Bill Bradley (he was instrumental in forging a bi-partisan agreement during Reagan times, 25 years ago), Marty Feldstein (Professor of economics from Harvard, advisor to Reagan) and David Leonard (NY Times columnist, Pulitzer prize winner) on Charlie Rose show.

Marty Feldstein as expected, he being groomed under Reagan politics, want to rollback the tax benefits that promote energy efficiency etc which are more salubrious to republicans whereas the other two are more for progressive ideas like how to encourage corporations to employ more. Watch this.

link to full program here

http://www.hulu.com/watch/269252/charlie-rose-the-debate-over-tax-reform-tim-arango

Related posts:

1. Lance Roberts: The Great American Economic Lie
2. eRead the Economic Report of the President
3. The Myths About Reagan: Spending

First, futures update: Dow futures are down 289 and S&P futures are down about 32. I would say, it is not as bad as many feared. We just have to wait till Monday and see how things will shape up. [I would venture to guess, the markets will be down big at the open and immediately recover.]

Jesse is a veteran of Wall Street. I believe he is retired and invests his own money. He always writes thought provoking essays, often with supporting data. Being a gold bug, off late he has been putting up only gold charts. Jesse broke his silence today (emphasis mine).

07 August 2011

It’s the Unfunded Wars and the Financial Fraud, and the Unwillingness to Reform

Yes, the US has some very real long term issues with Social Security and Medicare.

Social Security is being strangled by the refusal to raise the income limit on the Social Security withholding tax in response to the gradual creep of inflation. If this limit was raised periodically the Social Security ‘problem’ would be resolved.

One could consider ‘means-testing,’ not providing benefits to the better off, but that strikes to the heart of the program, which is not an ‘entitlement’ but as an insurance trust, distributed uniformly to all participants based in part on their contributions over the years.

Medicare and in particular the drug portions of the program added by the Bush II administration are driving costs much higher. And this is more of a problem because of the structural cost problems in US healthcare system. Big Pharma in the US is a powerful lobbying force, and Americans pay MUCH higher costs per benefit for their health care services.  This is inhibiting the steps that are needed to restructure the US healthcare system.

But Social Security and Medicare, without the drug program, have not substantially changed since the 1990′s, when the US was running a budget surplus, and then Fed Chairman Greenspan was reassuring the public that the Fed had a plan to deal with the lack of debt.

So what changed?

The repeal of Glass-Steagall and the growth of unregulated financial products, the co-opting of the regulatory agencies, the growth of corporate influence in Washington, and two unfunded and very costly wars of long duration, based largely on lies and distortions based on a terror attack by a small group of people, coupled with tax cuts for the wealthy.

There is relatively little discussion, much less investigation, indictments and convictions, from one of the largest financial frauds in history.

And within twelve months of the crisis breaking, Wall Street bonuses were back to record levels, even as the rest of the country began its long downward spiral into debt, downgrade, and despair.

That is the long and short of it. And it bodes ill that these issues are so infrequently mentioned in the political and economic discussions circling Washington and New York today.

Rational discussion and factual analysis has been overwhelmed by a well funded program of propaganda and sloganeering, and bought and paid for politicians and media which serve to direct the discussions according to the program of the monied interests.

And this is why the outlook for the US is so negative. Governance has failed, the system has been thoroughly corrupted or co-opted, and the planning and discussions cannot gain traction. Some have recently referred to Obama’s clarity gap because it is so unclear what he stands for, what principles he is willing to fight for.

The politicians of both parties, the media, and the business leadership are caught in a credibility trap in which the root causes cannot even be discussed, must less addressed, because they have all been involved in or benefited from a massive injustice in the financial frauds. They are complicit, and cannot act openly and honestly for fear of losing control of the debate, and of subsequent discovery.

“Every thing secret degenerates, even the administration of justice; nothing is safe that does not show how it can bear discussion and publicity.” -Lord ActonAnd who do we see on American television this morning, providing economic advice and promoting the Wall Street prescription for a cure through a return to more bank deregulation? The angel of economic death, Alan Greenspan, a man without shame or honor as one of the great authors of the misrepresentations and mismanagement that led US into the financial crisis which rewarded the few at the expense of the many.

The real issue at the end of the day is reform. The US has been led down a dark alley and strangled in what history may recognize as a financial coup d’etat, and a campaign of economic war against the common people.

My thoughts, exactly.

Related posts:

1. Unexpectedly a Lot of “Unexpected” News
2. New Found Spine or Mass Wake Up Call?
3. Wall Street Pay Rebounds

On April 18th, I posted  this note about Goldman’s take on S&P’s outlook change on US debt.

There is a saying in Telugu, “dongalu dongalu oollu panchukunntlu” (Just like thieves divided the villages among themselves to rob). True to this age old maxim, Wall Street banks and the ratings agencies robbed us of our retirement nest eggs, drove most of us jobless, and kicked us out of our homes in a collaborative manner. No matter what they do now, they are not going to be trusted or respected by those with an iota of sense.

If ratings agencies were to be trusted, today would be a watershed event. S&P just downgraded US debt outlook to “Negative” from “Stable” citing a “material risk that US policy makers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013” and concern that even once agreement is reached, it might still “take a number of years before the government reaches a fiscal position that stabilizes its debt burden.”

Duh!A big Duh!

This time, their collaborative thieves at Goldman Sachs disagree with S&P.  From Zero Hedge:

Not surprisingly, after eagerly pushing rating agency opinions to clients buying CDOs from Goldman, the firm’s economists are now eagerly trying to talk it down: “Clearly, the US fiscal situation is unsustainable unless a large, multi-year fiscal tightening is implemented.  However, there is no information in today’s report about the fiscal situation that was not already known.  Academic research has generally found that rating agency actions lag market pricing, rather than lead it. Any relevance of today’s announcement is a) as a potential catalyst for renewed market focus on these issues, particularly if the other agencies follow suit, b) a signal of a nonzero probability of an outright ratings downgrade over the next few years.” And who was the research conducted by? Moody’s? A Princeton Ph.D. academic? Yes, we know the country is screwed. But we can sure do without this condescending BS.

Amen, brother!

They say there is honor among thieves. But these thieves, are something!

Goldman didn’t appear to say much on the actual downgrade itself. However, they cut S&P 500 targets. Here is Goldman’s reaction.

We reduce our 2012 S&P 500 earnings forecast to $102 per share (from $104) and lower our year-end 2011 price target to 1400 (from 1450) due to downward revisions of GDP growth estimates in the US, Europe, and Asia, along with our commodity strategists’ 2012 Brent crude oil forecast of $140/barrel. Our 2012 global GDP growth estimate is now 4.4%, down from 4.6%. We maintain our 2011 EPS forecast of $96 based on strong earnings momentum in 1H 2011 despite weaker than expected economic growth. We expect 15% S&P earnings growth in 2011 and 6% in 2012 driving 17% upside for the index through year-end 2011 and 21% return for the next 12 months.

We expect profit margins to peak in 2011 at a level slightly below our previous estimates. Our estimates for S&P 500 margins remain 8.9% in 2011 and are now 8.7% in 2012, down from 8.8%. That view differs starkly from bottom-up consensus expectations for 9.1% margins in 2011 rising to 9.6% in 2012. We now forecast  margins will decline in five sectors including Materials, Information Technology and Consumer Discretionary.

We lower our S&P 500 sales per share estimate by 1% to $922 ex-Financials and Utilities. Our revenue growth forecasts are now 10% in 2011 and 7% in 2012 and are generally in-line with consensus expectations for 12% growth in 2011 and 6% sales expansion in 2012. The most notable change in our sector sales estimates a -4% revision in Materials sector.

Commodity prices remain a headwind. Goldman Sachs Commodities Research’s forecast for Brent crude to rise 21% to $140/barrel by year-end 2012 is premised on the view that global GDP growth above 3.5% will create a supply-demand imbalance and push oil prices higher until demand rationalizes. High oil prices boost our aggregate sales estimates, benefiting the Energy sector at the expense of lower sales and margins for other US firms.

The current S&P 500 correction is the 15th such pullback since 1975. The index stands 12% below the April 2011 high of 1364, so the drop is 620 bp smaller than the median correction of the past 35 years. At 97 days, the current episode is in-line with the average duration of past corrections.

Multiple contractions during prior market corrections suggests the current forward P/E multiple of 11.3X could be near a valuation-multiple bottom: (1) during the financial crisis, S&P forward P/E bottomed at 10.8X in October 2008; (2) in April 2010 the P/E reached 11.5X as the market digested Europe sovereign credit concerns and slowing US growth; and (3) our uncertainty-based P/E estimate suggests a fair P/E between 9X and 11X. If we are nearing valuation support levels, continued downside risk wouldshift to earnings estimate revisions as well as attendant macro risk premium.

Hey, it comes from the best and the brightest on planet Earth, so it must be accurate. Right? Just as a reminder, I present this chart once again.

Forget the fact that Goldman disagreed with S&P outlook in April. This time, for all you know, Goldman forecast may prove accurate.

Nevertheless, caveat emptor.

Related posts:

1. The S&P Downgrade “Shocker” and Goldman Response: Where is the Honor Among Thieves?
2. Goldman Disects Hedge Fund Holdings
3. Goldman: Don’t Blame Us

On Friday, Aug 5 2011 at 8:01 PM when all financial markets (ex ForEx) in all western countries have closed for trading, Standard and Poor’s downgraded US Debt. Via Bloomberg:

S&P lowered the U.S. one level to AA+ while keeping the outlook at “negative” as it becomes less confident Congress will end Bush-era tax cuts or tackle entitlements. The rating may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt, the New York-based firm said yesterday.

Lawmakers agreed on Aug. 2 to raise the nation’s $14.3 trillion debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years, less than the $4 trillion S&P had said it preferred. Even with the specter of a downgrade, demand for Treasuries surged as investors saw few alternatives amid concern global growth is slowing and Europe’s sovereign debt crisis is spreading.

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said in a statement late yesterday after markets closed.

This downgrade is not the first. Dagong Global, a Chinese State sponsored rating agency has downgraded US debt late last year. The act was laughed at by most Western investors and politicians alike. China now gloats about the latest downgrade. [Via Xinhua, the official Chinese news outlet]:

Dagong Global, a fledgling Chinese rating agency, degraded the U.S. treasury bonds late last year, yet its move was met then with a sense of arrogance and cynicism from some Western commentators. Now S&P has proved what its Chinese counterpart has done is nothing but telling the global investors the ugly truth.

China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets.

To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means.

…

The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone.

It should also stop its old practice of letting its domestic electoral politics take the global economy hostage and rely on the deep pockets of major surplus countries to make up for its perennial deficits.

A little self-discipline would not be too uncomfortable for the United States, the world’s largest economy and issuer of international reserve currency, to bear.

Though chances for a full-blown U.S. default are still slim now, the S&P downgrade serves as another warning shot about the long-term sustainability of the U.S. government finances.

…

All Americans, both beltway politicians and those on Main Street, have to do some serious soul-searching to bring their country back from a potential financial abyss.

What caught my fancy are these lines:

For centuries, it was the exuberant energy and innovation that has sustained America’s role in the world and maintained investors’ confidence in dollar assets. But now, mounting debts and ridiculous political wrestling in Washington have damaged America’s image abroad.

There in lies recognition of true American spirit. Not only what sustained America’s leadership in the world is its exuberant energy and innovation, I am confident that it will continue to be the leader by getting its act together. The political circus of excessive deficit spending, especially on wars, and ideological demagoguery. Yes, US should cut its massive spending on defense, which is where the bulk of the waste is, and then on entitlements. At the same time, US should bite the bullet and revert Bush tax cuts.

It will be tempting to blame this entirely on Obama especially for those righwing nuts out there. Lest we forget, President Bush doubled the deficit in his 8 years by over $5 Trillion. Other than the $700 b stimulus he pushed for, Obama inherited all this mess from Bush.

Listeners of my Telugu internet show MMGL, heard me say on July 29th show the following:

• The US will not default on its debt this week as many callers feared (Check)
• A debt deal will be reached between Democrats and Republicans (Check)
• Just like the spoiled child rolling on the floor crying in a super market gets everything from his parents, Republicans will get what they want in the debt deal, like no tax increases. [It happened just as I said it would. Even the spoiled child analogy was used in the polls conducted afterwards. However, the polls were too politically correct - they referred all politicians as spoiled children. A child who only got 2% of what he asked for is not a spoiled child.]
• The debt downgrade would probably happen, regardless of the debt deal. [It did]
• The markets will most likely sell off. [They did]

All the above assertions by me played out almost exactly I said. A broken clock analogy comes to mind. Seriously, they were educated guesses.

I am asking myself, “What next?” I am assimilating information from various sources. I will post my musings in a day or two.

In the immediate term, I think on Monday market will open down big (most likely go up at the close). The only regret I have is closing all equity puts towards the market close on Friday.

Related posts:

1. Blog Roundup: Is France Next to Get a Downgrade?
2. China Downgrades US, Again
3. Morning Update: 2011-08-10

Related posts:

1. HP Slate, the true iPad Competitor
2. Morning Musings: 2011-08-09
3. All About Europe’s Sovereign Debt Crisis in One Picture

Source: The Economist (Click on the image for interactive graphic)

As I mentioned several times, India with only 128% of debt burden (sovereign + consumer debt) and huge population, is the right place to be for economic growth, closely followed by China.

Related posts:

1. S & P Downgrades US Debt. Now What?
2. Consumer Credit: The Engine That Stalled the Economy
3. All About Europe’s Sovereign Debt Crisis in One Picture