Word of the Day: Downgrade

Published on: 17:01PM Aug 08, 2011

 down-grade [doun-greyd1. A downward slope 2. To assign to a lower status. To minimize the importance of. In a decline toward an inferior state or position. 3. To reduce in importance, esteem, or value...


The word of the day is obviously "downgrade."  We were warned, and now that it has happened everyone seems shocked. The problem I see is now that the US Fed has essentially been downgraded because they hold "AA+" US debt, what happens to the other countries?  What now happens to the ECB who holds billions in euros from "junk" rated Greece and Ireland, shouldn’t they be downgraded as well? How about the Bank of Japan, shouldn’t they be downgraded?  How is France not downgraded from "AAA" with billions tied up in worthless European debt?  As you can see, the problem could certainly start to spiral from here.  Will the other ratings agencies be pressured to downgrade the US as well?

Another question one should ask is who rates the "Ratings Agencies?"  With massive errors now being pointed out in how the downgrade was computed, who is around to keep the rating agencies in-line?  I am of the opinion they have no experience "rating" a country or an economy of this size and magnitude. Therefore their numbers are simply arbitrary, and can be viewed and positioned in a number of ways depending on your angle of interest. Bottom-Line they are extremely subjective! 

In the end however, I am hoping this ever confusing madness will prompt investor and global traders to rely more on their own due diligence rather than simply the opinion of some "Ratings Agency."  Do you really believe the ability of the US to repay debt has changed one bit from last week to today??? Absolutely Not!

As I mentioned above, a bigger concern is that additional downgrades could be coming down the pipe for other countries as well, or the "Credit Rating" agencies will simply start loosing all credibility, which they may have already done.  In any event, the short-term outcome this morning doesn’t look pretty, and the "outside" markets will weigh heavily on commodities across the board. 

I also want you understand that if more pressure is put on the "Agencies" to downgrade France, it will leave Germany as the only real solid backer in the European debt debacle.  From what I am hearing this could be a real pinch, especially since Germany is already starting to seriously balk on the entire European bailout plan.  As of right now, they seem to be increasingly less willing to risk everything they have worked hard for in order to bailout an almost certainly insolvent European World (can’t say I don’t blame them).  

It was once believed that iif Germany backed out, China would come to the rescue. That doesn't seem to be the case right now, as insiders are reporting that China is getting cold feet as well, especially after seeing that the European Central Banks themselves not real eager or willing to take on the risk. 

The "DOWNGRADES" are certainly a major concern, and no one knows for sure how it will all turn out.  Remember, this is new waters for the US.  Don’t completely freak out though.  Standard & Poor’s has downgraded other big nations in the past.  In fact, they cut Japan’s ratings three times between 2001 and 2002.  Ironically, just the opposite of what one would have thought actually happened, their bond yields fell, and their cost of borrowing actually declined.  Canada was downgraded in 1992 with virtually no reaction from the markets at all.  Unfortunately in 1994, when they were downgraded again things didn’t go as well.  

I am just letting you know, this is uncharted waters for the US to be in this position, and NO ONE is certain how the markets will react during the corse of the next several weeks.  

How the markets will react seems to be a matter of who you ask. Some of the big boys are talking that the the pension funds and global funds around the world with requirements and commitments to their investors to hold "AAA" rated assets will be forced at some point to liquidate their "AA+" US Treasury holdings for safer "AAA" investments.  Heavy liquidation could ultimately cause bond yields to push higher and interest rates to start climbing.  

Others are taking the stance that the bigger players already knew the downgrade was coming and therefore, a large portion of the news has already been priced into the markets, and was, in fact, the cause of last weeks heavy selloff.  I am personally more inclined to find myself in this camp, rather than to think a massive multi-day blood bath is in order.  Certainly it could be rocky out of the gates, but I believe over time the US is still strong than most others, and bargain shopping will ultimately prevail. 

I am actually hoping something "good" comes of it all.  In playing sports, I was always taught to never blame the umpire or the officials if we were to loose the game.  My folks always told me, it was not the coaches fault (he wasn’t on the field playing the game...I was).  In fact, any play he called was designed to go for a touchdown if every single player on the offense side of the ball did his job perfectly.  Right now, I feel like I am at a little league game listening to a bunch of whining parents complain about a bad call from the officials.  This time around though it’s a bunch of whining politicians and top Washington brass bitching about the bad "call."  This is exactly what is wrong with this country these days.  Everyone wants to point fingers and place blame on someone else for their own inadequencies.  Sure the downgrade seems like a bad call by Standard & Poor's, but maybe it will send a wake up call to those who are actually "playing" the game.  My belief is that if the "players" where doing their job properly the outcome of the game would not be left in control of the "officials."  I was taught to never let others control your destiny or your fate.  Work your hardest, be honest, and leave the field with your head held high, knowing that you have given it everything you had.  If it wasn’t good enough, you simply tipped your hat, and vowed to come back next time even stronger.  Those in charge of our country have to stop looking for ways to "cook the books" and ways to blame others.  Acknowledge the problems at hand and make the necessary adjustments.  Yes, doing the right thing can sometimes be painful and involve great sacrifice, but in the end, I have found it is truly the only road to victory! 

As for how the Agricultural markets will respond... 


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