Its time to learn from our mistakes ...... or is it?!!!

It seems to me that the credit rating agencies are try to "learn" from their past mistakes and spice up their tarnished public image …. But that they are barking up the wrong tree. Do you recall the notices from the rating agencies warning investors not to invest in the Fannies and Freddies of this world? No, neither do I. And these entities were assigned triple A status being backed by the full faith of Uncle Sam. How about the repeated warnings about Mortgage Backed Securities? Or the bonds of Lehman or AIG? Or sovereign debt of bankrupt countries?

So now lets learn from our mistakes. And repeatedly warn that the US faces a downgrade due to its debt ceiling fiasco. However, in attempting to being extra vigilant and super duper cautious, they clarified their warning of a downgrade by saying that their concerns would be lessened if the US reached some deal on the debt ceiling, or better yet, eliminated its self imposed debt limit altogether.

The US should have had a downgrade on their sheer quantities of debt a long time ago, and they should be lowered again if the ceiling is raised. The ceiling is there for a reason. To remove it altogether, is adding to the problem, rather than solving it. It is like adding wood rather than water to a burning hut. It should not lessen Moody's concerns, it should add to them.

The last 15 years have seen a bloated economy take on increasing amount of debt, live far beyond their means, all due to interest rates way below market level. Banks have been expanding the money supply based on accounting gimmicks, worsening the problem. We don't need the credit agencies coming to tell us that they would have lower concerns if the debt ceiling would be eliminated altogether. I cant see how that would solve any problem.

What goes up ....... must come down!

Not been the best few days in terms of economic data coming out of the States:

Consumer Confidence: pretty much non existant! Consumer confidence is now lower than at any point in recent history, including all of the previous disasters, financial crises and tragedies, including the 87 crash, the collapse of Lehman Brothers and 9/11. And dont forget the re-election campaign kicks off in earnest, with the USA full of unhappy and unconfident people! QE3 anyone?!!!

ADP Non farm employment: a downward revised figure of 177k for April was followed by a puny 38k for May, on expectations of 178k. A deceleration in employment, while disappointing, is not entirely surprising. In the first quarter, GDP grew at only a 1.8% rate and only about 2¼% over the last four quarters. This is below most economists’ estimate of the economy’s potential growth rate and normally would be associated with very weak growth of employment.

ISM Manufacturing: Lowest reading since September 2009, the first reading below 60 in 2011. Granted, 60 is the level at which the ISM typically peaks, but the worry is the sheer slide towards a reading of 50, below which is in contraction mode once more.

Downgrades: As expected, the "experts" are downgrading their view of the economy, with Goldman Sachs, Morgan Stanley as well as JP Morgan (TWICE IN ONE WEEK!) all downgrading the US economy.

Bank Stress Tests: Then we've had the news that the 2nd round of stress tests for European banks has been delayed because of "errors" and "unrealistic assumptions". How comforting! Especially since the whole point of the Stress test round 2 was to instill confidence in the European banks!!!

The stock market, and Fed, and just about everyone in between is seemingly caught in a catch 22 situation: QE3 is seemingly being priced in by stocks ...... however for QE3 to actually happen, stocks would have to fall approximately 15-20% from their current elevated levels!!!

-------------------------------------------------------------------------------------------------LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!

US to default?

With the world and their Mother watching the European sovereign debt drama unfold with abated breath, the not insignificant risk posed by a U.S. sovereign debt crisis increases by the day. The risk of a US default continues to rise which can be seen in the sharply increased cost to insure U.S. sovereign debt. Risk of a U.S. default can be seen in the credit default swap (CDS) market. 1 year U.S. CDS has risen from 23 to 37 or by 60% in the last six trading days (see chart).



























The orange line is the US CDS premia, yellow is Japan and pink is the UK.


In the more liquid 5 year U.S. CDS, the cost to insure has risen by some 50% in the last week. Whereas there is normally minimal trade in the US CDS market, the norm is a handful of trades (sometimes as low as one), last week saw investors placing 135 trades in U.S. CDS’s. Just to compare, there were 360 CDS trades on Spain's sovereign debt, 191 on Greece, 142 on Portugal and 136 on Italy. A US default would not be “catastrophic” it would likely lead to a very sharp fall in the U.S. dollar, (especially versus the hard currency, collateral and monetary asset that is gold), sharp fall in U.S. bonds and sharply higher interest rates. This has the potential to create another systemic crisis involving sovereign nations and banks globally and could lead to a deep recession. Indeed, it would not be unfathomable to suggest that the S&P “warning” of US debt was a mere warning precisely because it was the US in question. Anyone else would have resulted in a downgrade of 3 notches at least!-----------------------------------------------------------------------------------------------------------------
LEGAL DISCLAIMER: The views mentioned above are purely that of the author, and does not necessarily reflect the official view of Goldrock Capital or employees. Unless of course the aforementioned view was a phenomenally good call, with exquisite market timing, in which case Goldrock Capital reserves the right to all credit!!!!!