Commentary on the U.S. Downgrade

The markets worldwide got slaughtered today (actually, it's been a few weeks now).  Nearly everyone pointed to the downgrade by S&P of U.S. debt as the reason.  I think that's just a smokescreen for a much bigger fire.  And ask yourself, if the downgrade is so negative for Treasuries, why did they rally so hard today??

What ails us is far bigger than historic downgrades.

Worthwhile commentary from John Hussman today hit on more important topics, most notably this tidbit:

"Coupled with the slowdown in year-over-year GDP growth, the composite of economic and financial evidence we presently observe has always and only been associated with ongoing or immediately impending recessions. This is not an opinion or a viewpoint, but a fact of the data."

Very interesting considering everyone on Wall Street has been suggesting a second-half recovery.  We shall see.

And he also touched on the real #1 issue facing the U.S. (and global) economy: 

If there is one crucial point that should not be missed, it is this: the fundamental source of our economic challenges, from joblessness, to unresolved housing strains, to sovereign debt crises, is that our policy makers have repeatedly opted for fiscal band-aids and monetary distortions instead of addressing the core problem head-on. That core problem is simple: the careless encouragement of asset bubbles, and the refusal to restructure bad debt.

Encouraged by inappropriately easy monetary policy and lax regulatory oversight, the U.S. went on a debt-financed binge of consumption and unproductive investment that lasted nearly a decade. When that binge collapsed, policy makers ignored the fundamental need to restructure bad debt, and instead fought tooth and nail to defend bondholders and lenders who had extended credit carelessly. We are now left with a global financial system where the debtors are incapable of making good on those debts, and governments around the world are frantically trying to prop up bad debt with public funds and monetary policies aimed at distorting the financial markets even further.

…

The way that our policy makers address the recent weakness in the markets will tell a great deal about the prospects for a durable recovery. If the policy initiatives focus on subsidizing bad debt on the fiscal side, and distorting the financial markets on the monetary side, it would be best to use whatever short-term enthusiasm those proposals provoke as an opportunity to further reduce risk. The best policy responses are those that relieve some constraint on the economy that is binding. Another round of policies geared to creating an even larger sea of zero-interest liquidity, re-igniting asset bubbles, or further lowering already depressed Treasury yields, would be a signal of panic and incompetence from the Fed. If policy makers instead push to facilitate debt restructuring, coupled with pro-growth fiscal responses (e.g. R&D investment incentives, full funding of the National Institutes of Health, productive infrastructure investment, etc), yet another drawn-out cycle of distortion and crash might be avoided.

The Fed, the European Central Bank, the IMF -- these are the agents of the status quo and of large financial interests.  Their policies are ruinous.  I fear that instead of doing the right thing, policymakers will do the same thing they've been doing, only more of it.  The big picture is that we have wasted 4 years and untold trillions trying to hide the fact that nothing has really changed.  I could be convinced to go along with intelligent deficit spending (Hussman gives some ideas in his commentary) if it buys us time to restructure the underlying imbalances in the system.  But we've done nothing of the sort.  We've gone outside and put ice cubes on the thermometer and claimed we fixed global warming.

Despite that, it must be noted that I did put money to work today near the close.  That works for me, my risk tolerance, and current allocation.  Unlike most investors, I feel my eyes are wide open to the risks we face.  Careful out there.

Comments

[supra shoes for boy]

Thanks, I'm going to have nightmares tonight.