Standard & Poor's Lowers the Boom on the U.S.

As if Mondays weren't tough enough as it is.

Standard & Poor's gave the world markets a reason to hate this Monday more than most as it put a "negative" outlook on the U.S.' credit rating. In short, what that means is that the S&P has put the U.S. on its naughty list and may lower the country's credit rating from AAA.

Let's go ahead and call a spade a spade here, though -- the stock market sell-off in the wake of the announcement is pretty silly.

Granted, there would be a definite impact for many companies if the U.S. were, in fact, downgraded. Insurance companies such as Hartford Financial (NYSE: HIG  ) , Metlife (NYSE: MET  ) , and Progressive (NYSE: PGR  ) tend to hold sizable chunks of Treasuries and could be hurt if prices started falling. Meanwhile, companies with significant debt loads such as GE (NYSE: GE  ) , Caterpillar (NYSE: CAT  ) , and DuPont (NYSE: DD  ) could see borrowing costs rise if Treasury yields started to rise.

But ...

Take a deep breath
First of all, the S&P report suggested that there's a 1-in-3 chance that the rating agency will lower the U.S.' rating over the next two years. Hogwash. S&P has final say over whether that actually happens, but that's nonsense. There's certainly a very non-zero chance of the U.S. needing a downgrade, but is there really a one-third chance that the U.S. will need to be downgraded to be in line with Slovenia, Spain, and Chile?

And as far as accuracy in judging creditworthiness goes, perhaps it's a cheap shot to bring up those pesky mortgage and other structured securities that S&P and fellow raters Moody's (NYSE: MCO  ) and Fitch deemed to be of AAA mettle before they cost investors billions (trillions?), but it's not like that experience is ancient history.

Of course, it seemed that equity investors were the only ones significantly sweating S&P's move. The dollar fell against the yen but rose against the euro, while the yield on 30-year Treasuries fell.

Perhaps bond investors are looking at this from a broader historical context. As economist and New York Times columnist Paul Krugman pointed out, after S&P cut Japan's rating in 2002, yields on the country's debt stayed ridiculously low. So low, in fact, that -- as Krugman also notes -- betting against Japanese bonds came to be known as the "trade of death."

The real story
An economist from Nomura Securities had an interesting quip on the outlook change, saying "S&P has served a useful public service by putting all parties on notice that words and actions in the political debate have consequences."

Amen to that.

In other words, this ruler-on-the-knuckles from S&P may be meant primarily as a wake-up call to U.S. politicians to urge them to act more like grown-up leaders of a country and less like snotty schoolchildren. The brinkmanship during the U.S. budget debate -- which nearly brought the government to a standstill -- may have just been a warm-up for the showdown on the debt ceiling. And if Congress can't get its act together on these shorter-term matters, is there really hope for them to tackle more significant challenges like the longer-term fiscal road map?

S&P's "1-in-3" probability on downgrading the U.S. is bogus. However, I certainly hope the rating agency's message is able to get through the thick skulls of the folks in Washington so we can start seeing some real progress on mapping the country's financial future.

Health care is one of the biggest challenges the U.S. faces. My fellow Fool Morgan Housel recently asked: How would you fix the health-care system?

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Read/Post Comments (17) | Recommend This Article (32)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 18, 2011, at 4:55 PM, Borbality wrote:

    I can't believe how much money we put into such a silly thing as these world equity markets.

    OMG THE U.S. HAS LOTS OF DEBTS AND ITS POLITICIANS ARE A BUNCH OF CLOWNS??? SELL! SELL! THIS IS NEWS TO ME SELL!!!

    Geez what a world.

  • Report this Comment On April 18, 2011, at 4:55 PM, militauro wrote:

    The entire time reading this article, I was thinking "at least it'll push the politicians" until I got to that part in the end. Good read!

  • Report this Comment On April 18, 2011, at 5:00 PM, TheDumbMoney wrote:

    S&P threatening to downgrade the U.S. is like a remora telling a shark that it's an evil carnivore.

  • Report this Comment On April 18, 2011, at 5:13 PM, ManillaWise wrote:

    "S&P's "1-in-3" probability on downgrading the U.S. is bogus. However, I certainly hope the rating agency's message is able to get through the thick skulls of the folks in Washington so we can start seeing some real progress on mapping the country's financial future."

    Wait a minute, you know it's bogus but the thick skulls of Washington don't? That might be a bit of a wishful doublethink on your part.

  • Report this Comment On April 18, 2011, at 5:22 PM, UncleSam01 wrote:

    These are the same guys, along with Moody's, that cost the Citizens of the United States TRILLIONS of dollars by providing AAA ratings to the house of "toxic asset" cards that threw our country into recession, cost 15 MILLION American jobs, ruined untold municiple and civic bond investments, and destroyed the pension funds of millions more hard-working Americans. They should be in jail. Who in the world believes ANYTHING they say about America's credit-worthiness or anything else? Are we all asleep?

  • Report this Comment On April 18, 2011, at 5:52 PM, TMFKopp wrote:

    @ManillaWise

    "Wait a minute, you know it's bogus but the thick skulls of Washington don't? That might be a bit of a wishful doublethink on your part."

    Perhaps.

    Though sometimes for politicians perception/optics > reality. They may not want to try and call S&P's bluff on that one.

    Of course the cynical view -- which is, alas, not that unlikely -- is that both sides read what S&P has to say and put their own spin on it to simply serve their individual agendas. Then, instead of it bringing the sides together ("we've got to get something done here"), it just intensifies the rift.

    Matt

  • Report this Comment On April 18, 2011, at 6:13 PM, neamakri wrote:

    So I logged in about 10:00 this morning and everything in my portfolio was down. Being contrarian, I purchased 400 more Chimera (CIM) at a great price. I already made twenty bucks on that by the end of the day!

    I want to thank all those who follow the crowd with the knee-jerk reactions (for my extra profit). Hopefully we Fools see the bigger picture...and are greedy when others are fearful.

  • Report this Comment On April 18, 2011, at 7:45 PM, RavensRule wrote:

    When you are quoting Paul Krugman, who's philosophy is more government spending is the answer to any economic situation, must remember that it is the Feds that are controlling the rates and playing a shell game by printing more money to buy up our own US treasuries. Are we forgetting about inflation here?

  • Report this Comment On April 18, 2011, at 8:00 PM, Darwood11 wrote:

    Yeah, as if S&P's announcement was "news." Anyone with a half a brain (the left half, in this case) has known this for about 25 years.

    Let's see, about 1/2 of the country pays income taxes, and about three of us work to pay for the retirement or "OASDI" benefits of the rest. (As of 2003 according to the SS administration, 47 million Americans were receiving benefits).

    Ultimately, if the U.S.doesn't get its fiscal house in order, everyone under the age of 50 can plan to work until at least 70 just to pay the bills.

    PS: As an aid to being employable, "Learn Mandarin." You'll make a good servant some day.

  • Report this Comment On April 18, 2011, at 9:27 PM, pastreet wrote:

    Why does everyone seem so surprised. We all knew this was coming. The country is in real trouble if we stay on the same path. Taxes need to rise, entitlements need to fall. No entity can spend more than it makes indefinitely.

  • Report this Comment On April 19, 2011, at 1:48 AM, dgmennie wrote:

    I think it is important to realize that entire countries (including the USA) can have ovewhelming financial problems. It has happened many times in the relatively recent past and will, no doubt, happen again. Of course S&P along with many other other "credit rating" agencies have all but lost their credibility of late, so they can say most anything now about anybody and few will accept their opinions (even when justified) as fact.

    But for a moment lets assume that the US presently deserves a credit downgrade. What are individuals suppose to do? Invest in Euros or Chinese currency? These alternatives have no long-term track record of value stability, and are even more subject to irrational, self-serving local political manipulation than is the US Dollar.

    Real protection of our financial system must come from within. Genuine leadership in the US would see to it that we exit from all overseas conflicts, cut large numbers of workers off Government payrolls at all levels, negotiate and improvise for the best prices on gas/oil while bringing alternative energy online ASAP (and supporting the most promising research). Only alternative energy that makes economic sense should be encouraged. Government funding for large-scale unworkable pipe dreams should not be available. I trust the laws of thermodynamics will rout the pipe dreams before their cost becomes significant.

    Profiling should be brought into play at all US points of entry. Hostile intent can already be identified by CIA and NSA electronic evesdropping, which now a fact of life. We pay billions every year to gather such information, but is it really being used effectively? Most of those arriving from other countries who would do us harm can be identified and turned back before taking root.

    What we cannot afford anymore is political correctness. Every superstition, religious belief, political opinion, culture, pseudoscience, or popular what-have-you is not of equal merit. Pretending otherwise so as to not ruffle any feathers will only invite a disaster of unimaginable proportions.

  • Report this Comment On April 19, 2011, at 4:27 AM, WyattJunker wrote:

    I'd rather we stopped being the world super cop. Its expensive and buys us nothing.

    Also, let's back out of social security. Its gross and stupid. The Chilean pensionado program is much healthier and politicians can't game it. People actually own their own individual accounts. Its very healthy. If we don't do that, then let's admit ss is a farce and remove all taxes off dividends and just push people over there for their retirement.

    As far as medicaid, repeal Zerocare and Bush's prescription drug bennie.

    That should do it.

    No higher taxes required.

    Balanced budget in under 4 years.

    If anyone would like to vote for me, let me know.

  • Report this Comment On April 19, 2011, at 8:13 AM, DJDynamicNC wrote:

    This has been mentioned over and over again already, but sometimes a dead horse just needs beating - S&P just cost the world economy trillions of dollars by rating mortgage-backed securities AAA. Does anybody actually believe a word these people say?

    And DGMennie - I'm not sure why cutting large nnumbers of jobs would improve America's fiscal situation. Care to explain?

  • Report this Comment On April 19, 2011, at 9:01 AM, Darwood11 wrote:

    It's interesting that the Dow dropped about 1.14% on this "news." It makes me again wonder just how sophisticated the average investor is.

    This news didn't change anything we didn't already know. So why the drop?

    It seems the lemmings are still headed for the cliff. I suspect if I allow it, they'll take my portfolio with them.

    To be honest, it's the reaction that makes me re-consider my participation in the market. I guess I'll have to step back and take the longer term perspective for my investments (again). Hmmm. U.S. bonds, foreign bonds, U.S. stocks, BRIC stocks, or gold? U.S. deficit ratio at 120% in 2016? Time to dust off "The Crash Proof Portfolio."

    It was just a shot across the bow and Europe doesn't look that much better. Are we ultimately in a race to the bottom? Should the rating agencies simply face facts and downgrade a chunk of the developed world AA-? Then what? My guess is, that's what the gamblers in Washington are thinking.

    Mr. Lou. CIC's Chariman, addressed the Bao Forum and stated "from the investment perspective [we're] not very optimistic about Europe" according to the WSJ. China is fretting the removal of American stimulus in 2012, and America's failure to solve the problems in the real estate market, which is yet to bottom out.

    I agree with the author and would hope the politicians get their act together. However, it was, it is and it probably will remain "party first, some citizens next, and country last."

  • Report this Comment On April 19, 2011, at 1:30 PM, dgmennie wrote:

    To "DJDynamicNC" -- You must understand that government workers of all stripes are TAX CONSUMERS. Some may provide needed services, but none contribute anything to the GNP. When the proportion of government workers (relative to all workers) is small, this is not a huge problem. But today we have far too many people on the public payroll. Not only do they get "near lifetime" employment, they also get medical benefits, pensions, and other perks often FAR IN EXCESS of what is available in the private sector. Just one example: retiring government workers picking up six-figure payouts for "unused sick days and vacation days." If you work outside the government you use your sick days and vacation days in the year earned. If not used, they are eventually gone. You do not collect a big cash windfall when you finally decide to retire. And pensions -- who gets a pension anymore besides government workers? Why should middle-class employees in the private sector have to pay for this via ruinous property, sales, and income taxes? It is totally unrealistic and has (or will soon) bankrupt many states. The only practical solution is a much smaller population of government workers and a totally revamped benefits package for any new hires. Yes, this will mean some high-visibility cutbacks (fewer police, firemen, teachers) but it will also call for serious back-office streamlining with many government agencies of dubious merit and all their attendant baggage ELIMINATED. Meanwhile, essential services must continue operating, but with far less management and support staff.

  • Report this Comment On April 19, 2011, at 4:22 PM, plange01 wrote:

    america is over two years into a depression and it does not have a president!!

  • Report this Comment On April 19, 2011, at 5:13 PM, TMFKopp wrote:

    @plange01

    You crack me up, thanks for weighing in!

    Matt

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