Unless you have been completely out of the “loop” and not in tune with what has been going on in the U.S. financial markets as of late - on Friday evening, Standard and Poor’s (the S&P) announced a cut/downgrade of the U.S. credit rating from AAA to AA+. Never in history has the U.S. been rated lower than AAA.
What does this really mean? What is the impact on what the S&P has to say regarding the downgrade of the U.S. Debt? Are they not the same organization that failed to downgrade any of the debt of the “sub-prime” mortgages that led to the credit crisis of 2008? Are they not the same Company that failed to downgrade ENRON the day before they went broke? The same agency that gave Lehman Bros its AAA rating the day before it went bankrupt?
Why do we give any credence to anything they or any Credit Agency has to say? Hopefully – if anything, the S&P will serve as the atomic thrust to those we voted into power in Washington D.C of what needs to be done to get our economy in order and back on track.
Expect the volatility to continue. The emotional assault to the hard working Americans will be extreme and super charged first thing Monday. It is still the same story - but the Media will blow this up.
But why? If you really think about it, economically – nothing has changed. Did we not know this already? Think of the AAA rating as a score of 100 and AA+ rating as a score of 98! The U.S. ability to pay its debt has not changed. Going from AAA to AA+ doesn’t change anything about the U.S. given that most of the world is still in need of a place to invest.
In fact, Moody’s and Fitch, the “other” rating agencies have both reaffirmed the U.S. AAA rating. So what has changed? Is not the U.S. still the most liquid market in the World for money? Nothing has changed! This should not affect the buyers of U.S. Treasuries as they offer the most Safety and Liquidity to investors of the U.S. Treasuries like China.
So what is the best thing to do given the frail emotional state of the economy? In any highly super charged emotional event – the best thing to do…is to do nothing! Do NOT panic - relax…take a deep breath…and assess this from a higher level. The wrong decisions are most often made in highly emotional situations.
With that said – of course FEAR will cause many to sell when the markets open Monday morning and the extreme volatility will continue. Expect it.
Long term – this too shall pass as it is the same story….just a different day. This can be fixed and the AAA rating can be restored.