Wednesday, August 10, 2011

The Downgrade, and the Fed

Longtime financial equities analyst Dick Bove has publicly been a clueless ass for a long time, including in a big, huge way all throughout 2007 and 2008 while the financial crisis besat the markets and left Bove holding the bag as he preached that all of the nation's largest banks and brokerages would be just fine. Oh, Bove will deny he ever said any of that now -- just like any good Wall Street analyst does with regularity these days -- but I was there, on the inside, hanging on the guy's every word, and let's just say he has been a confirmed clown for a long time and I was sure that would pretty much never change.

But for once, Dick Bove finally got something right. Go read Bove's piece at the link above about the S&P downgrade of the U.S. debt, where he basically nails it, in agreeing with my statement yesterday that we should actually be happy to have only dropped our credit rating from AAA to AA+ given the actual state of our national debt situation. I could read this stuff about people slamming on the S&P for even deigning to consider downgrading America's debt all day long, but my side would hurt from the unending guffaws and knee slapping from what I was sure at first had to be the rantings of people confined to insane asylums.

Here's a good general piece of advice for those of you who are interested in learning more about the financial markets: if someone has posted this week that S&P are a bunch of "idiots" (or insert your other ad hominem personal attack sans any intelligent or sensible justification) for their "flawed" analysis of the U.S. debt situation, quickly delete that bookmark just as fast as you can and don't ever read there again, because that my friends is a person who is simply far too blinded by false patriotism, naivete, or just a general lack of big-picture understanding to ever be able to see the truth. Anybody who thinks that S&P's job is to continue rating U.S. debt as "risk-free" even while there still right at this moment remains a good chance that we default on our debt at some point in the next six months, and while Tea Party and Republican members of Congress repeatedly declare publicly even just today that they are willing to push our country into default if that's what it takes to get our president to stop recklessly spending printed money that we don't really have, quite simply does not have even a basic understanding of S&P's role in the marketplace.

Yes, S&P and all its lesser competitors embarrassed themselves horribly with respect to the excessively positive ratings given to collateralized mortgage securities for years during the past decade. But the suggestion that S&P now is somehow required to continue that incompetence when faced with pretty much the easiest, clearest downgrade from "risk-free" status perhaps in the recorded history of mankind, reflects a lack of understanding about how the marketplace works in general so profound to make nothing else ever said by such a person even worth reading again.

Update: The Fed's FOMC just released their statement following the FOMC meeting in Washington, DC today, and the results are shockingly short on any support for the financial markets in my view. Basically, the Fed is announcing (1) that the economy and the jobs market are much worse right now than had previously been expected, and (2) that the Fed will maintain short-term interest rates at zero -- where they've already been for the past three years -- for at least another two full years. How that is supposed to make anybody feel confidence about the market right now is utterly and completely beyond me.

Which might explain why the Dow was up 210 points at 2:15pm just seconds before the FOMC announcement, and is now tanking big time.

Doesn't anybody in Washington know what to do or understand what is going on these days?

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Blogger Astin said...

Something has the be kept in mind when critiquing rating agencies.

Who pays them.

It used to be they were paid to rate something by those who were interested in investing in it. ie.- the clients.

Now, they get paid by the side PROVIDING the instrument. So in the past, if I wanted to buy, say, a bond, I'd pay S&P to rate that bond (assuming they hadn't already done so for someone else). But today, it's the company selling the bond that pays them. Their interests have shifted with the revenue stream. Before, they'd rate honestly, because they got paid by the purchaser. Now, they rate in favour of the seller because that's who paying the bills.

In the case of rating countries, they aren't getting paid by the government, so they can be more honest with their ratings. Granted, they're still slow as hell on changing to the negative (look at Europe and the US), but when they eventually get to it, it's probably the right call.

2:33 AM  

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