First of all let me just say that a large percentage of recent volatility has been the result of program and day traders taking advantage of the US Treasury downgrade and global debt crises via high frequency computer trading. Probably in upwards of 70 percent of the sell offs, these trades create and vindicate fear. The overnight news has been swinging the indexes upwards of 200-500 points in a day. There is almost no sensibility in these market conditions. Rather, investor activity is overwhelmingly reactionary.
I don't believe that on August 4th the US was fundamentally less risky than it became the next day following the downgrade. There is little risk of default because if need be (not without consequence), America can print money! This being said, the lack of political cooperation, albeit frivolous budget cuts and looming future expenses such as Medicare/Medicaid and pensions are very real issues. As Bill Haas of PIMCO noted, the real present value of the projected debt is somewhere in the neighbourhood of 66 trillion. This is not to be made light of, but can and will be overcome. America works, and will prevail.
On top of the debt ceiling woes and political bi-partisan politics, it seems as though the general lag in the US economy is what has legitimized fear and as such this downgrade. These long term fears coupled with stubborn unemployment and poor growth have cast a large shadow over the economic future of the United States. The European debt problems are more fuel to the fire. However we should not forget that the US is in the middle of a recession; one stimulated by the second largest global market collapse in the last century. As Warren Buffett noted in his July 8 interview with Bloomberg, America had 1 million new home owners a year and was building 2 million homes in the same amount of time leading up to the recession. Naturally, when the bubble burst years of over production would beat down employment. When American construction is suppressed so heavily that spills over in to many industries. Let us not forget how massive the real estate market is in the US. When the equilibrium is reached, demand will steadily drive unemployment down and production and growth will resume their normal duties. This is capitalism; its cyclical and extremely powerful. It can make investors think the market will never again crash (1999 and 2007), and that the economic world will end - right now. This is why we also should not put too much expectation on the influence of fiscal and monetary policies. While useful, these are secondary to the waves of supply and demand. I encourage you to watch the whole interview here:
There is one more bone I have to pick with the influence of the S&P downgrade. I cannot figure out how they regained their reputation so quickly. Following the 2008 meltdown, many people across the globe were calling for rating agencies to be punished. Had they not AAA rated toxic CDOs, the house of cards could never have been built. Now, only 3 years later their ratings are the heralded crystal ball again? Sure they made a huge mistake before and this downgrade seems more sensible given the evidence, but they continually under cut their credibility. For example, they downgrade the US debt, Warren Buffett responds by saying it should be rated quadruple A (non-existent) and they turn around and downgrade Berkshire. Say what you will about the fundamentals, but this is childish and the reactionary/vengeful undertone is clear. Last, what about the other agencies maintaining their AAA? How come the UK or France werent downgraded? Its all too shaky. Besides, when push comes to shove investors should be doing their own diligence. Full Stop.
I guess in the end this global debt problem is only going to create some very good value opportunities. For this I am grateful. Be fearful when others are greedy and be greedy when others are fearful.
