Standard & Poor’s Hacks Downgrade…America!

And now we learn that Standard & Poor’s, the same unprincipled hacks whose grossly inflated triple-A ratings made America’s real estate boom and still-busting bust possible, has downgraded the USA itself.  Or to be more precise, their long-term outlook fell from “stable” to “negative” – a Kremlinesque way of hinting that an actual downgrade from AAA is possible if the U.S. doesn’t get its fiscal house in order (as though that were even possible, given that the Federal debt is $14.3 trillion and climbing, and that the economy is on a permanent respirator). And whose payroll is S&P on, we wonder?  Until yesterday, we thought they were so busy putting the screws to Europe’s financial cripples that there wasn’t time or manpower enough to pore over America’s books. Now, it would appear, they’ve found actual fiscal problems to worry about even if the real worries eupted like Vesuvius three years ago. And another thing: Whenever they slam the PIIGS by taking their credit ratings down a peg or two, it is usually to buoy the U.S. dollar that day so that Little Timmy Geithner’s pep talk at some Rotary Club luncheon gets good press. Whatever the reason for yesterday’s downgrade – about as shocking to millions of Americans as the revelation that Liberace was gay – it was fun to watch the bond market react.

Or rather, to not react. T-Bond futures ended the day down a few measly ticks, although the obligatory swoon on the “news” allowed predators who live off such volatility to shake down the rubes. The June contract plummeted more than a point-and-a-quarter on the opening bar, then spent the rest of the day making fools of those who had bailed out at the lows. Nice to see the bonds acting conflicted for a change. On the one hand, USA Inc. took one small step toward its inevitable bankruptcy.  On the other, the weak economic outlook prevented bonds from sinking on inversely rising yields.  Doubtless, those who bought did so with a quick-exit strategy in mind.

Gold, Silver Swoon Too

The quasi-criminal shakedown wasn’t limited to the Bond pits either. Gold and Silver both took a flying dive for no particular reason – other, perhaps, than a fleeting lack of demand as traders tried to figure out what it all meant. The answer to that question being “nothing,” bullion quotes soon recovered even more sharply than Treasury debt when it was realized that Standard & Poor’s tasteless publicity stunt had laid an egg.  For our part, we held an existing position in Silver Wheaton over the four hours that it took for the hysteria to run its course. Although the stock swung more than $4 yesterday to close down $1, we’re not convinced that silver bulls are out of the woods.  Actually, we’d been looking to short silver ETFs on the opening, and although the rally spike on the opening bar missed our offer by pennies, we might be tempted to try again on Tuesday.  On the bullish side, June Gold still has a ways to go before it bumps into any Hidden Pivots that look capable of briefly reversing the tide. If you’re interested in our precise targets for Comex Gold (and Silver) but don’t subscribe to Rick’s Picks, try a risk-free seven-day trial by clicking here.

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  • Cam Fitzgerald April 20, 2011, 3:47 am

    Terry, don’t feel discouraged by what I wrote or read too much into the comments from the wrong perspective. I still firmly believe we are in a long-run commodity super-cycle that will go on for many years longer.

    I also anticipate gold to reach newer highs eventually too and have long predicted a minimum price of 2500 dollars although that may be a conservative estimate these days.

    My comments were related to what I see as a medium term trend change and I apologize for not having stated that unequivocally. I just have to know when to draw the line when writing and not take too much space and I make assumptions that others already understand that what we are discussing is an event that veers from the anticipated course and is something we need to acknowledge in order to avoid losing money while that trend is in progress.

    The bare idea that the dollar might appreciate on Euro weakness is not really all that radical and it has in fact happened many times before. We should always expect that market changes will not flow evenly in one single direction until an end arrives. Indeed, they rarely do.

    So don’t worry too much. I have not become a recovery(ist) exactly and I still share the concerns of most that debt levels are really excessive and climbing while monetization is a significant concern we need to keep our eye on.

    Background overseas events will keep us very busy trying to stay focussed though. That is what we are now seeing as the advent of an electoral backlash against the bailout of failed nations comes to the surface. This is a major concern if you speculate in currencies.

    It is, in fact, a game changer for the moment.

  • Terry S April 20, 2011, 1:58 am

    …the Illusion that China’s not # 1 (to be followed by another/other BRIC’s smart enough to do it better than Uncle Sam) that the USA can still come out on top with its trillion dollar nightmares in tow; that the Recovery will save the day (my favorite). Hey, since Rick’s quit the inflationist/deflationist wrangle, let’s start one with ‘Recoveryist’ {Lord, years ago I could count on CF commentary on Kitco forums but not here}

  • Terry S April 20, 2011, 1:35 am

    @Carol et al …yes, my bad. Once again: Asia freaks as AAA rating threatened; buys more – the best looking girl on stsge – more orchestrated Dollar shinaigans; Bond yeilds down, at least short to medium term. Mechanisms will no longer matter, only keep the ILLUSION going will matter. No real way to ‘deal’with trillion dollar deficits and debts. Can’t stop the printing presses no how! Look for 1:16 ratio, ag to au – probably at $100/125 to $1600/-1750.

  • Oliver April 19, 2011, 7:36 pm

    Chris T.: good points, I partially agree, but I don´t see the green party as that homogenous, it keeps transforming.
    But this is in effect not why they are so successful at the moment, in my opinion. I think it´s anti-establishment protest that gives them the edge right now, not their quasi-hidden agendas, which surface when they are in charge. But I see, we agree on that point, that they APPEAR to be anti-powers-that-be.
    Thank you for the competent elaboration.

    • Chris T. April 19, 2011, 11:10 pm

      definitely agree on the appearance.
      If I had been a voter in southern Germany, B-W, short of not voting at all (the general m.o.) I probably would have voted for them too, even though I obviously don’t think much of them,, because:
      a) throw the bums out is needed
      b) even if the new ones are bums too
      c) especially when the old bums have been there for close to 60 years.

      I am not horrified at this result at all, the way average middle class voter was.
      Its all the same to me.

  • Richard April 19, 2011, 7:28 pm

    The “virtuous circle” is alive and well-the insatiable demand for $ denominated paper continues.

    Long bond bears will be crushed-God only knows what Bill Gross’s highly advertised bond position really is all about-I think it’s a bear trap.

    Nevermind Tyler Durdens excellent exposee of the FED desk’s selling of zillions of t-bond puts and other derivatives-which, if true, is a potential financial neutron bomb–not a peep out of Rick Santelli!!-note that Rick doesn’t-as he should–loudly stress EVERY TIME when grading auctions-that the FED has bought 70%…and not a peep out of anyone else on CNBC or Bloomberg.

    Central banks and sovereign funds are “frozen in headlights” as they behold the endless creation of Treasury paper in the U.S.–they would like to sell…but to whom? God?

    Oh, yeah! No mention of the Texas University that bought a $billion for its endowment fund…

    • Rich April 19, 2011, 8:02 pm

      Gold that was, Texas T.
      Black gold not doing so badly either…

    • Chris T. April 19, 2011, 11:19 pm

      UT and the 1B Au:

      Reading the story, it appears that they were persuaded to no longer keep paper silver, whatever forn they had bought (futures, calls, ETF???).

      But, they “took”delivery and now warehouse it with HSBC?
      The second largest short after JPM?
      That doesn’t sound very smart.

      They should have just place this stuff atop the UT tower 🙂

  • Larry D April 19, 2011, 6:54 pm

    “…about as shocking to millions of Americans as the revelation that Liberace was gay…”

    O, Rick – thou hast surpassed thyself once again.

  • Chris T. April 19, 2011, 6:52 pm

    “Green party (which is not only about being “green”, but also traditionally anti-government establishment) ”

    The Greens are hardly anti government, far from it. They are the party of ecological and conduct fascism:
    banning light-bulbs, zoned city driving areas, forced trash-separation into, at this time 5 different colored containers, with COMPOST police inspecting the consistency of bio-garbage and fining if too wet, to dry, etc (Tuebingen), or forced solar pannels (Marburg), forced sex-equality, gender mainstreaming, declaring “racism” as mental disease and on and on.
    They are just as happy to wield the cudgel of the state as anyone, and they are even willing to be militaristic, so long as the military endeavor suits their needs (Sudan, etc).

    Other than Fukushima, maybe S21, providing them an uplift, the major reason for their rise is that people are fed-up with the in-crowd, and the Greens appear to be not the in-crowd.
    Why they are the ones looking like the outsiders, is only because true dissent from the German post war system has been stifled by all actors, perhaps most of all by the so-called conservatives.
    The latter learned their lesson 30 years ago: Never let an outlier on your away-from-center flank get any traction, as the Greens did to the Reds.
    That the outlier to the CDU/CSU does NOT have to be fascism is conveniently glossed over by all.

  • Terry S April 19, 2011, 5:26 pm

    Let’s play ’cause & effect’ : Feds debase dollar; SP downgrades outlook; Asia freaks, China must reduce $3B US reserves, sells same ; bond price up, yield down (Uncle Ben’s {expressed} goal). ” Varrllee Ingtallessting”

    • Carol April 19, 2011, 5:37 pm

      Terry, unless I am misunderstanding you, if China sells bond prices will fall -> yeilds go UP.

    • Robert April 19, 2011, 11:40 pm

      Ditto Carol…

      Selling bonds and having the prices consequently rise would be akin to Bonds reversing all fundamentals of supply and liquidity…

      selling bonds = increased bond supply = lower prices = higher yields.

  • A. Rand Fan April 19, 2011, 5:12 pm

    Standard & Poor’s has a timeline they tout noting the warning of investors “well in advance” to the 1929 stock market crash. Now look at the 2004/08 section and you can see how S&P was for looking out for investors then. http://www.standardandpoors.com/about-sp/timeline/en/us/

    • Rich April 19, 2011, 8:06 pm

      Hey, they grew to 6500 employees in 20 countries…;

  • Terry S April 19, 2011, 5:00 pm

    Well done, Rick – had me laughing over coffee this morning. You are truly a wordsmith!

    • Rich April 19, 2011, 5:04 pm

      Totally agree: tour deforce Rick.
      KHAG kah-SHARE v’sah-MAY-akh all…

  • Oliver April 19, 2011, 4:47 pm

    Germany, Germany… “of how EU (Germany really) will get around Finnlands opposition), obviously you are quite right when one equates the German gov with Germany at this point, but, beware: the German populace does not like anything these days coming from the EU. People are slowly reaching boiling temperature and there´s absolutely no one I talk to – for the exception of some people in finances, as usual – that don´t agree that we are all in big trouble and that the worst is still to come.
    There are still a lot of elections coming up this year, and the Green party (which is not only about being “green”, but also traditionally anti-government establishment) is now in the position due to poll-results (28 %! nationwide) to actually have to discuss who could be a candidate for chancelorship!
    The Green party so far has not had the guts to openly go for a more anti-Euro stance, but they tend to spell trouble to the powers-that-be on almost all issues of life: especially hard nosed capitalism and banksterism.
    Germany may very well become a black swan for the EUlite…
    The Green party already rocked the state of Baden-Würtemberg, an absolute bedrock of conservatism, now governing the state with a smaller SPD (labour-party of sorts, social-democrats).
    Merckel is very, very nervous.
    She smells it, too, that the Germans are getting more and more irate about the bailouts, and not only about atomic energy.
    The Germans never wanted the Euro, really, and were always very sceptic. More and more experts are changing sides, too, or those that would always rant over the Euro-myth are now being heard in mainstream-media.
    The EUlites´ greatest threat is Germany and people want Portugal, Greece and Ireland out.
    Everybody on the street knows that that will not be the end to the EU nor to the Euro as only 17 of 27 countries actually are in the Euro.
    Take my example: I am a libertarian, free-market conservative and my party of choice would be the CSU (bavaria) – but I´m a member of the Pirate party now. Member!, not just voting: vote I do strategically, like many Germans.
    So this is not over, that whole bailout thing…

    • Rich April 19, 2011, 5:01 pm

      When East and West Germany reunited, Deutscheland Mark Uber Alles just a matter of time…

  • Rick April 19, 2011, 4:39 pm

    Excellent analysis, Cam. Thanks.

    • Cam Fitzgerald April 19, 2011, 7:34 pm

      Thanks Rick

  • redwilldanaher April 19, 2011, 4:25 pm

    S&P? I remember when they were the largest food market chain in the USA from coast to coast. I didn’t realize that they were still around and had migrated into the ratings business. Not a bad idea. Very few barriers to entry and if any culture ever suffered from “white mouse retention syndrome”…

    • Rich April 19, 2011, 4:58 pm

      Gerbills…?;

    • Rich April 19, 2011, 8:00 pm

      Next:
      Safeway credit ratings for a club card preferred rate Just for You…;

    • Marilyn April 19, 2011, 9:10 pm

      Wasn’t that A&P?

  • Carol April 19, 2011, 2:06 pm

    Its just a ploy to put “fear” into the market to exert pressure on CONgress to raise the debt limit. Once that is done, S&P will change their ratings (as if anyone cared) back to “stable” (lol).

    • Rich April 19, 2011, 4:56 pm

      Moody’s did similar in 1996.

      Debt ceiling an issue in the 80s also, defacto Temporary debt ceiling larger than the official Permanent debt ceiling.
      Reagan got the economy going with lower taxes, but Dem Houses under Tip O’Neil (Chris Matthews chief of staff) and Baker, Dole and Byrd in the Senate, took US from world’s largest Creditor to largest Debtor on Reagan’s watch, topping the dollar.
      It would be really interesting to see the opposite unwind…

      http://www.the-privateer.com/usdebt/79-86.html

  • Worthy April 19, 2011, 1:41 pm

    Nice to see such humility Cam! 😉

    • Cam Fitzgerald April 19, 2011, 8:12 pm

      OK, now you are making laugh!!

  • donniemac April 19, 2011, 1:13 pm

    I don’t really think that S&P is doing anything to help anyone in this administration. For me, a more pertinent question is why is anyone paying attention to S&P ratings after the fiasco with the mortgage backed securities?

    And I disagree with Cam on the price of precious metals. I remember several years back Rick talking about gold, and by extension silver, prices becoming market bubble driven to the point where worthless mining stocks would be priced to very heady levels. I think we are getting close to that scenario now. My humble opinion anyways.

    • Cam Fitzgerald April 19, 2011, 1:29 pm

      No problem at all Donniemac. Plenty of people disagree with me. But I am still right.

    • Robert April 19, 2011, 7:45 pm

      “I remember several years back Rick talking about gold, and by extension silver, prices becoming market bubble driven to the point where worthless mining stocks would be priced to very heady levels. I think we are getting close to that scenario now. My humble opinion anyways.”

      DonnieMac- can you name me one “worthless” gold stock that is trading at an unheard of P/E ratio….?

      Just one?

      Most of the miners I follow are trading at market caps lower than the extraction and smelting cost of their proven deposits.

      True- everyone is TALKING about Gold, but so far, only the Asians, and a few astute Europeans and Arabs are DOING anything about it.

  • Cam Fitzgerald April 19, 2011, 6:10 am

    `
    You know I am in a minority camp here in discussions about USD. You might even call me a contrarian. I have, over the last week of so been expressing my belief that a dollar rally lies ahead and that the extremely high Euro would be taking a tumble.

    I have as well expressed concerns that the commodity cycle was overbought and that excess speculation there was threatening to derail an evolving recovery. My expectation was that we would see a reversal of that class of investments on dollar strength and that this was both welcomed and long overdue.

    This past Saturday as well I expressed doubts about Monday’s (todays) market and was vindicated in my predictions this morning when a broad market sell-off did indeed transpire, turning commodities South and briefly lowering expectations of precious metals while the dollar rose in strength.

    There seems to be conflicting ideas about what is happening in the market right now based on what I have seen in the media and on some on-line commentaries. We need to take note that there were four events over the weekend leading the news for this week.

    First, we received news that housing prices in Beijing had just collapsed 27% month-over-month and that sales nationally had fallen 50% over the past year.

    Second, on Sunday, the Chinese government announced it was tightening lending further and raised bank reserves again to an incredible 20.5% which will drain dozens of billions from that economy and further restrict credit.

    Third, elections in Finland saw the True-Finn party make a startling leap from 4% to 20% of the National vote and leaving open the suggestion that they could form part of a coalition and push demands that would effectively end their cooperation in more Euro bailouts.

    Fourth, S&P announced that it was putting the US on credit watch while leaving the current triple AAA rating fully intact.

    That last item was dismissed out of hand as irrelevant and currency traders have adjusted quickly. It was not really the kind of news that would give real alarm anyways because everyone (with the exception of the big bond raters) already has the dollar on credit watch every single day.

    As in, just look on your computer screen…and watch.

    What really moved currency markets though was the news of the Finnish elections and legitimate concerns that the new government that forms there might actually refuse to sign on to more bailouts for Greece, Ireland and Portugal.

    Now that really was news. It is one event that nobody could control because the election results represent the will of a large percentage of the electorate of a nation that was not even on the radar screens two weeks ago.

    Furthermore, the news of more Chinese tightening is giving some a lingering suspicion that country is indeed pushing the frontiers and may suffer a boom/bust scenario as outlined and forewarned by the IMF.

    It is great to have plenty of reserves on hand but the downside is that this really represents a distortion in the Chinese economy. What we are learning is not that they (Central Control party guys) are good managers of their economy after all but that they have run out of good ideas and are instead merely building a bullwark of capital and credit capacity against an unpredictable future.

    And so as the US dollar rose today as I have been anticipating the natural conclusion would be that commodities would take a tumble and precious metals would feel a few jitters too. All of these things have now happened.

    I expect the dollar to continue it’s rise and that the Euro will begin a corrective phase. We are certainly not in the clear where a Euro debt crisis is concerned. We will watch and await how the Fin government is formed up too.

    This is actually very welcome news as commodities, and oil in particular take a breather for a spell and allow some of our inflation concerns to abate.

    It is my belief too that we are on the verge of a long overdue correction in precious metals. Furthermore I see that oil will fall just below 100 dollars over the coming months and that most commodities will see a temporary suspension of the hard rally that has been going on for most of the past 8 or 9 months. The Middle East an North African troubles seem to have been priced in to most markets by now as well. Gaddaffi’s departure while perhaps not imminent is certainly inevitable.

    It now remains to be seen whether there will be further Quantitative Easing measures announced as the commodity bull settles down for the summer. My belief is that the Fed will take a wait and see approach with the economy with no new announcements made until late Summer of Autumn either for or against.

    And this is why the S&P news of placing the US economy on credit watch was just a red herring of a story and not worth much in market moving strength. Of much greater concern is how the EU (Germany really) will get around Finlands opposition to more bailouts and how much damage may come of a real housing bust that might just be beginning now in China.

    Let us not forget that commodities are very vulnerable to what happens in Asia at this stage of the game. That economy is far too invested in its current infrastructure build-out which represents such a large share of GDP and naturally accounts for a very large bulk of resource buying all around the globe. Economic imbalances are certain to be magnified as time goes by if the Central planners cannot come up with better ideas.

    Like letting the Renminbi float for example.

    • Rich April 19, 2011, 4:45 pm

      The Fighting Irish, Icelandics, and now the Finns, all standing up to the banksters.
      There’s hope for Americans.
      If everyone just closed their digital accounts and kept their assets in tangibles including cash dollars, the leveraged usury laundry game would be kaput in a week.
      CNBC Beyond Oil showed China the number one wind turbine installed base in the world. Then a local pointed out there were no power transmission lines.
      Windmills indeed…

    • Robert April 19, 2011, 7:39 pm

      Great post, Cam.

      I agree with your assessment regarding the dollar, and the Euro/Yuan situation.

      The dollar is being called onto it’s death bead by an awful lot of people. Everyone expects the bottom to fall out if it goes below 72…

      For that reason, I’ve had to raise some dollar denominated cash the past few weeks- dollars look cheap to me. Luckily, I have been able to raise dollars via simple profit taking, leaving considerable exposure to ride in oil and the PM’s without risking my long term capital growth trend-

      The only interesting thing rattling around in my skull is- if/when the Chinese RE market rolls over, and if chinese manufacturing and output follows suit, what will that do to the chinese appetite for Gold?

      If the chinese bias swings to favor the yuan over Gold, then things could get real interesting real quick in the PM space.

      conversely, if the chinese economy experiences a deflationary blip, then it could incite even more panic out of currencies and into PM’s…

      Trying to formulate a hedging strategy based on what might happen halfway around the world at night as I slumber blissfully should be giving me insomnia…

      Luckily, it is not.

  • DG April 19, 2011, 5:09 am

    Are you saying Liberace WAS gay??

    Maybe they can create this kind of volatility daily for the next few years and “front run” our way out of debt.
    Just the President’s working group “working”

    • Rich April 19, 2011, 4:38 pm

      Not now…;

  • JohnJay April 19, 2011, 4:40 am

    The S+P downgrade might just be part of the big con the government has been running for decades.
    An ongoing scheme that they know is nearing the end.
    Now comes the part where they pretend they are being “forced” to take draconian action, which of course means grifting you and I one more time.
    Same thing goes for their little farce in Congress about cutting 60 billion dollars, and pretending to have a big fight over it.
    At least they won’t have to bother cutting up newspaper into dollar size to put in the envelope they will switch on us.
    FRNs will do just fine.

    • Robert April 19, 2011, 7:26 pm

      “The S+P downgrade might just be part of the big con the government has been running for decades.”

      Just might be?… c’mon JJ- your intuition is prescient- first impressions are correct 99.9% of the time

      Or, is it mere coincidence that S&P issues a “neutral to negative” shift, and several hours later Moody’s comes along as declares the US “stable”…?

      When combined with the fact that the Obama administration, the Fed, and other connected insiders (read: Pimco’s Mohammed El- Erian) were given advance notice of S&P’s announcement on Friday, giving them the entire weekend to call out the talking heads, and write and proof read their “reactions” to the news, this whole thing is orchestrated, choreographed, and staged following politics 101…

      S&P plays the “bad cop”, Moody’s plays the “good cop” and the American Taxpayer plays the inmate who dropped his soap in the shower…