S&P Downgrade Comments

With the recent downgrade of the US credit rating by Standard & Poor’s, I wanted to share my views before the markets open in Asia and Europe later this evening and the US markets on Monday morning. I’m not sure where to begin other than to say, once again, we are in unchartered waters but I truly feel as though this isn’t nearly as bad as we saw in 2008 and long-term investors shouldn’t panic.

In 2008 we had a broken system, banks and financial institutions had CEO’s that were either crooked or didn’t have a clue as to what they were doing or how leveraged their companies were and a real estate market that popped.  This led to the collapse of the credit markets and liquidity  as we knew it then. Now we have a lack of confidence in the global economy: when you look at the Euro Zone where Greece, Italy and Spain are clinging to life, unemployment in the US at levels we haven’t seen in decades and to top it off, S&P downgrading the US credit rating for the first time ever, it’s only natural that investors are nervous.

In a nutshell, the US lost  its stellar credit rating because our elected officials (I wanted to say dopes but am trying to be respectful) in Washington’s opted to play a game of chicken with the other side of the aisle over raising the debt ceiling so the US wouldn’t default on its obligations.  This was partisan politics at its absolute worst, where grownups were playing with fire, but it was investors who got burnt again. The last thing we needed was to lose money in our 401k’s, IRA’s or any other type investment because our government leaders were more concerned about getting re-elected than coming up with a prudent solution to the ever growing deficit/debt problem. Who can blame China who owns more than $1 trillion of US Bonds for coming out and saying  shortly after the downgrade “Washington needed to cure its addiction to debts and live within its means”. In addition, we had retirees, veterans and our beloved soldiers who were being played like pawns with being told their checks may not be in the mail this month, or others who weren’t sure if they could get health care and the list goes on and on and on. As I said, politics at its worst.

Washington shouldn’t be surprised as to why S&P downgraded our credit rating from AAA to AA+. All three of the credit rating agencies warned Washington long ago that the US needed to cut spending  by at least $4 trillion over the next 10 years or they were in jeopardy of being downgraded. So at the very last minute, Washington only cut $2 trillion in spending which won’t begin to be felt until after the 2012 elections and into 2013 with no new revenue to speak of. S&P was more critical about how the process dragged on and why our leaders in Washington waited to the very last minute of the US defaulting before doing something. Fitch and Moody’s left their ratings as they were, although Moody’s said they still may lower its rating in the future. Please don’t forget, the US remains the best country in the world and it has the power to print money when needed, so anyone who owns Treasuries shouldn’t be concerned that they will lose money.

Investors shouldn’t panic now, it actually may be good because this was one of the last issues that Wall Street was worried about and Wall Street hates surprises more than anything else. Republicans and Democrats have no choice than to help repair the rating back to a stellar AAA, being forced to do what they didn’t have the courage to do before now. As for the economy, it’s all about jobs and finally Washington has to deal with it or else they may be unemployed next November like almost 15 million of their constituents are. The silver lining in all this and the reason why investors shouldn’t rush to sell their stock holdings tomorrow is that the economy is growing, ever be it so  slowly but growing just the same; unemployment is getting better but not as quickly as we need it to; Corporate America is the healthiest it’s been in quite some time with a boatload of cash on their balance sheets; and there is a lot of bad news already built into the stock markets. Stocks have overcome much worse in the past and the markets have always rallied back, I agree with so many economists that the stock markets will be higher at the end of the year than now.

YNN asked me some further questions and I pasted a link of the interview for you to watch  (there are actually two reports in one so you need to watch the first interview before mine plays).

http://capitalregion.ynn.com/content/552622/standard—poor-downgrades-u-s–credit-rating/