Saturday 6 August 2011

S&P, US Rating, China and grasp for credibility

Quite a busy week and still the news pours forth. All is positioning now after the markets have had their say;

S&P hs downgraded the US economy from it's AAA rating. It has done this because it said it was going too and is still trying to re-build it's reputation afternthe pathetic performance during the 1st credit crunch. They know this will upset the US administration and think this shows their independence. Yet without the other agencies joining in their reasons are transparent.

The US Government is also seeking credibility after a shambles of a week. They will go for S&P bog time I think as Obama must fear looking so powerless.

China too is getting in on the act, calling for a new world currency and flexing its muscles. China is in a bad spot really, having cheated to it's economy by holding down the Yuan it had to build it's stock of US debt; now they fear the comeback of this debt being unenforceable.

These power plays are most interesting to watch - have I got the dynamics right?


Budgie said...

So ... the herd is running away from equities which earn interest, doesn't like cash because of reducing value and too low interest, won't buy property because it is due for (another) fall, just so they can get into gold, which doesn't earn interest, cannot be eaten or lived in, depends absolutely on what others think it is 'worth' (ie not an absolute value) and is probably in a hoarders' bubble. And this is rational?

Richard Elliot said...

The US is going to be very unhappy about the downgrade. Just as Britain didn't enjoy losing its status as a global power, I don't think the US will enjoy losing its preeminence either.

It won't happen overnight, however, I feel it is inevitable over time. The US is still going to be important for generations to come, just not preeminent.

China / the East helped the global economy get through the first recession, but as you point out I don't think it will be in a position to do so again. Western consumers have stopped spending (including here in Australia) and they don't have a domestic market.

It's going to get a whole lot worse from here I fear before the global imbalances are worked out and balance sheets repaired.

All a bit gloomy!

Sebastian Weetabix said...

China is full of vanity projects, ghost cities & other white elephants constructed with a mountain of mis-allocated capital that will never pay back. Their official statistics are not to be trusted and there is a general culture of corruption, kow-tow, deception & cover up. Added to that they have the mother of all property booms with flats in Shanghai priced at a staggering 20+X average earnings. When China's boom blows up, which it will, the consequences are not going to be pleasant.

Bill Quango MP said...

The main redeeming feature of gold is it can melted down and cast into any shape quite easily. And as a metal it has no effect on the human body.

We can all get our teeth done.

Anonymous said...


gold does have some uses - notably as a conductor that doesn't rust. Secondly, the amount of gold available for mining - its not a lot (as a cube, it would fit under the Eiffel tower). Mind you, if you mined the Earth's core for gold, you could plate the surface of the Earth knee deep in the stuff.

Still, platinum makes more sense from the perspective of what it can be used for. But what about rare earth mines? Uses a-plenty, an export ban on the large chinese deposits, and not many other commercial deposits.....

Hopper said...

Does China have much leverage now it has actually bought so much US govt debt? I can see China being reluctant to buy more Treasuries, but it's rather stuck with what it's got - if it threatens to sell much of its holding it will drive down the prices and hence generate at least paper write-downs for its holdings.

CityUnslicker said...

Hopper, worse, selling US positions will raiseUS interest rates and then the US can buy even less Chinese goods.

When someone else owes you a ton of money, who is the one with the problem?

andrew said...

This whole mess - in the US and Europe happened because some people thought they could stay in power by spending money now and getting other people to pick up the bill ( other people being their children or another country ).

Having realised this, it looks like their behavior is not going to change.

Their analysis seems to be that if they could only hold on a bit longer, the problems would work themselves out.

My grandfather's uncle owned half of great yarmouth racecource, a couple of the theatres and some cafes before WW1. He had an untimely death and it turned out that there was little actual capital, but the underlying businesses were doing quite well and if he had lived another 5 years,he would have been out of trouble.

There is another company whose board probably also still think that if they had a bit longer everything would have been ok.
Called Enron.

Looking at Greece / Ireland / Italy / The US (or the UK) as a business, do you honestly think that things will really be better in 5 years time given their current policies and expenditure.

It strikes me that the Germans got a good deal - a place where things might be better in 5 years time - and we are expecting them to bail out other countries where there is no explicit pre-existing written agreement that they must.

I like to think I paid about 10k below the market price for my house in 1998.
If the ex-owner comes to me in 2011 and asks for that 10k, he will get a look of incomprehension, a bit like the German public are giving Greece.

We all see the partial default of a company as to be expected.

We do not see the partial default of a mainstream country as a possibility.

Our eyes are going to be opened.
I recommend This Time Is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart, Kenneth Rogoff

What this all means is not clear to me as yet.

What does worry me is that some commentators say that there is a lack of demand for investment - that we basically do not have enough good ideas.

This is not good for growth or generating new jobs.

CityUnslicker said...

I have a long list of good investment opportunities if you want some.

Steven_L said...

Always a lot of good investmest opportunites around after a fire sale.

Of course, the fire sale might not be over.

The secret is out. Read his said...

Very interesting

/\ /\ /\ said...

Oops, should be "Read this.." Sorry.

Electro-Kevin said...

The US has 12 supercarrier battle fleets in service.

China can't do very much really.