Perspectives on the global economic meltdown- (Nov 28 2010)

vina · Post by **vina** » 06 Aug 2011 09:20

Muh hwaa haa.. Finally one of uncle's poodles (or is it one of the heads of Cerberus the 3 headed dog that guards the gates of hell) finally got the cojones to bark and call a spade a spade and all hell has broken loose in the Obama administration in panic !

. Now frankly when they could dish it out all this while with their poodles/cerberus to other sovereign govts on mere whims and wholly unrealistic benchmarks, but cant take it when the boot is kicking their bottom, I have no sympathy for Unkil.

But a more "deeper" thought is what happens to all that Phynance theories about "risk free rate" ..All of Phynance is based on that, from portfolio math to risk neutral valuation and all that fundamental stuff. If US Treasury is no longer risk free , so what is risk free . A pill-o-soppy-cal kweschun that was ducked for so long by the e-Con-o-Mists. Well, this is something that is worthy of the likes of Super Comprehension to ponder over and chew on. Well, what d'ya know. Go ask Super Comprehension!

SwamyG · Post by **SwamyG** » 06 Aug 2011 09:50

The Americans are still fighting among themselves about who caused this. Dems are blaming Tea Party and Republicans. Republicans are blaming Obama. Tea Party is blaming Dems. Libertarians blaming everybody but themselves.

My uneconomic brain thinks this is all big nautanki and tamasha. S&P goofs up like over 50%; it is not even a joke. Will this cause USA to withdraw more into a shell? They definitely do not have the appetite to launch more wars. Killing OBL gave Americans some pride, this downgrade will cause them some shame - even if this downgrade is deeply suspicious/worrisome in itself. Right now ideologies triumph economics and common sense.

There is drama or backroom politics in this downgrade. Europe and America are getting more into deep shit. Who will cause more stink? And who will stand up first?

Satya_anveshi · Post by **Satya_anveshi** » 06 Aug 2011 10:22

ahem..ahem.. folks. as you safeguard your positions or change gears...do keep more powder dry and pop corn ready.

Neshant · Post by **Neshant** » 06 Aug 2011 11:26

SwamyG wrote:`Alas in six months, you will ask me the question again. And I will reply in a similar tone......samsara continues.

I did some checking in the archives & search engine on you.

Either I can't find the offending view points or I got you confused with someone else.

Neshant · Post by **Neshant** » 06 Aug 2011 11:51

a lot of cooking of the books is going on.
------------------

Beneath Jobs Report Surface Lie Some Ugly Truths

http://www.cnbc.com/id/44033486

SwamyG · Post by **SwamyG** » 06 Aug 2011 16:42

Neshant wrote:
SwamyG wrote:`Alas in six months, you will ask me the question again. And I will reply in a similar tone......samsara continues.
I did some checking in the archives & search engine on you.

Either I can't find the offending view points or I got you confused with someone else.

I knew you would be searching BRF, I was going to suggest you do that. Even if you search atala vitala paatala or naraka* lok, you wouldn't find any incriminating evidence. BECAUSE I have never held the view that ONLY banks and corporations should have been bailed out. I was neither their cheerleader nor witch hunted them. I realize banks and corporations, how much ever I criticize them, have a role to play in this society.

* A friendly former post might want to use Purgatory.

Satya_anveshi · Post by **Satya_anveshi** » 06 Aug 2011 19:22

SwamyG garu,

No offense but pl let it go.

Neshant has been quite vocal and consistent in identifying the root causes ailing the US and Global economy in general. There is little disagreement there. Where there is difference of opinion is the solution part to the problems identified and the time frames when certain outcomes, which some e-conomists think *should* result given the problems.

The passion with which Neshant argues sometimes sound as if he and some others belong to different camps when they are actually not. Difference is only on how certain things will eventually playout. I don't see a place for bitter feelings in all this. Let's get busy thinking how to make some moolah out of all this

Satya_anveshi · Post by **Satya_anveshi** » 06 Aug 2011 19:26

whatever happened to LDev ji..it's been a while since he last posted. Saar..do provide some perspectives on go-forward onlee.

gakakkad · Post by **gakakkad** » 06 Aug 2011 20:18

What would you guru's advice mango Indians for investing these days? Since interest rate in India are high FD in India seems to be good option . Would it be advisable to buy large volume of gold? (talking 1-2 kg range) . I have almost completely moved out of stock exchange in the past 6 months. Anything in Khanland worth looking into?

yogi · Post by **yogi** » 06 Aug 2011 23:36

Gold Emerging as an Alternative Currency (for black money & corruption)

RamaY · Post by **RamaY** » 07 Aug 2011 00:11

gakakkad wrote:What would you guru's advice mango Indians for investing these days? Since interest rate in India are high FD in India seems to be good option . Would it be advisable to buy large volume of gold? (talking 1-2 kg range) . I have almost completely moved out of stock exchange in the past 6 months. Anything in Khanland worth looking into?

If you are in india

Put you money in banks (FDs give ~8-9% return) and invest on agri-lands. Buy gold for your women ( mother, sister, wife, daughter), not to put it in banks. If you have any money left, invest in things like Akshaya Patra, Ekal, Samkara Netralaya, Rangde.org etc...

First area is for you, gold for family, land for society, donations for god. You will be wealthy soon.

Satya_anveshi · Post by **Satya_anveshi** » 07 Aug 2011 08:38

things are getting interesting: Germany doubts larger fund can rescue Italy

Hari Seldon · Post by **Hari Seldon** » 07 Aug 2011 14:45

Something's cooking. Smells funny too.

First, sample this:link

Investors had hoped the ECB would target Spanish and Italian debt in reviving its bond-buying stimulus program, but it restricted the purchases to Irish and Portuguese securities, not Italy's or Spain's.

Roberto Perli, managing director at ISI Group and a former staffer at the Federal Reserve, called the ECB's action "mysterious." "It sent the wrong message," he said.

Well, well, the secret's out so loud, the shell-shocked closest to the cannon barrel have gone temporarily or maybe even permanently deaf only. AEP reads out the writing on the wall loud and clear:

The ECB throws Italy and Spain to the wolves

The European Central Bank has abandoned Italy and Spain to their tortured fate.

Its refusal to act in the face of an existential threat to monetary union has set off violent tremors across the global financial system, raising the risk that the crisis will spiral out of control.
...
Jean-Claude Trichet, the ECB's president, said the bank had purchased eurozone bonds for the first time since March but this token gesture was confined to Ireland and Portugal, countries that have already been rescued.

Professor Willem Buiter, Citigroup's chief economist, said the apparent ECB action was pointless. "The warped logic of intervening in two countries that don't need it is as strange as it gets."

Mr Buiter said Europe risks a disastrous chain of events and the worst financial collapse since the onset of the Great Depression unless Europe's central bank steps in with sufficient muscle to back-stop the system.

"The ECB has yet so show it understands that it is the only institution that can save Italy and Spain from fundamentally unwarranted defaults. Everybody is afraid and real money investors are dumping their holdings. The ECB must step in to cap the yields at 6pc or 6.5pc and put a floor under the market," he said.
...
"As long as the ECB stays on the sidelines, a speculative, fear-driven withdrawal of market funding can feed a self-fulfilling insolvency. Any number of banks and insurance companies would take huge hits. The ECB will have to come in, or accept the biggest banking crisis since 1931," Mr Buiter said. He said the "fundamental design flaw" in economic and monetary union is the lack of a lender of last resort.

EU leaders agreed in late July to boost the powers of the eurozone's €440bn (£382bn) European Financial Stability Facility (EFSF) bail-out fund so that it may intervene pre-emptively in countries in trouble, but this has to be ratified by all national legislatures and may take months.

Mr Buiter said the fund needed to be increased five-fold to €2.5 trillion to be credible in the long run. "It is quite irresponsible that the euro member states decided to send their parliaments on holiday this summer before they had enhanced the EFSF to effective scope and size. Crises can happen even during inconvenient periods," he said.

The ECB is not riding to the rescue because it can't. Any shock-n-awe rescue effort simply won't fly in the surplus EU core. The game's darn near up, I reckon. Italy is the 3rd largest bond market in the world, part of G-7 and all. Its way too big to save. checkmate, mite.

Christopher Sidor · Post by **Christopher Sidor** » 07 Aug 2011 18:16

SwamyG wrote:The Americans are still fighting among themselves about who caused this. Dems are blaming Tea Party and Republicans. Republicans are blaming Obama. Tea Party is blaming Dems. Libertarians blaming everybody but themselves.

My uneconomic brain thinks this is all big nautanki and tamasha. S&P goofs up like over 50%; it is not even a joke. Will this cause USA to withdraw more into a shell? They definitely do not have the appetite to launch more wars. Killing OBL gave Americans some pride, this downgrade will cause them some shame - even if this downgrade is deeply suspicious/worrisome in itself. Right now ideologies triumph economics and common sense.

There is drama or backroom politics in this downgrade. Europe and America are getting more into deep shit. Who will cause more stink? And who will stand up first?

Spare a thought for the poor chinese, other east asian nations and off course the oil producing nations. Overnight their holdings of US Treasuries has gone from top notch to non-top-notch. Think about the 2-4 trillion USD held outside US when US debt now equals the US GDP Figures. Welcome to the 21st century, imperial Britain, Ooops sorry Amerika. 1945, 4 trillion Debt, out of which 2 trillion debt is for servicing so called "empire's Obligation."

I propose that we hold a prayer meeting for these unfortunate souls.

Christopher Sidor · Post by **Christopher Sidor** » 07 Aug 2011 18:22

^^^^
Just a clarification poor unfortunate souls are not the yanks. While US might not inflate its debt away, it just might drive its debt value to say near zero.

kmkraoind · Post by **kmkraoind** » 07 Aug 2011 18:59

The process of de-globalization has began. The US has started the process of globalization to hurt the controlled economy like USSR and it had lived to its expectation. But the clever Chinese have mastered the technique of globalization and are going to become the next super power. The only way is to stop that is de-globalization. In that process -

- US will devalue their dollar with respect to all major currencies.
- It will lead a trade war with China whose economy and populace schemes are built on cheap manufacturing.
- WTO will become defunct.
- In the process of de-globalization, major economic blocks will come up like EU, US, Middle East and SE Asia.
- There will be reciprocating relation with respect movement of technology, resources and security.
- Having advantage of geography, resources (both human, technology and natural) US will come out as first among equals.

Wondering what are Chinese options if US reverts back to de-globalization and isolationist ideas.

I think recent S&P downgrade of US credit rating

SwamyG · Post by **SwamyG** » 07 Aug 2011 19:30

Satya_anveshi wrote:SwamyG garu,

No offense but pl let it go.

Satya gar. No offense. He did this last time, I explained myself and stopped responding to his posts. I let it go the very first time

I do not care who or what he is. I had to post in a manner that required a moderator warning. If he addressed me, I will respond else I have no wish to pursue him. His solutions and views are extremist, one dimensional. We have had far better perspectives from others.

SwamyG · Post by **SwamyG** » 07 Aug 2011 19:53

The global trade genie cannot be put back into the bottle. It came into existence when we invented wheels and ships. As simple as that. India has enjoyed the benefits of trade for quite sometime. The Arabs and Europe went through the Southern India ports to reach Far East Asia. Not only Southern India provided transit ports, they also provide some of the products Arabs and Europeans were interested. But for the Himalayas, the people in North would have gone to Siberia

I distinguish North and South as regions that did not have shorelines. So in my definition Gujarat to Bengal are in South. The internal regions traded with other regions.

While the number of offshore stories to India is rising, I am not sure how USA will get back manufacturing totally back from China, without impacting the lifestyle of Americans and Chinese. Except the advances in medicine and health care, which we always welcome and cannot do without, there are several lifestyle conveniences we can probably get by without.

USA cannot withdraw with deep short term impacts to itself. Does it think the hardships and revolts are collateral damage? It is quite possible. I have held the opinion that when it comes to foreign policies, Dems or Repubs don't matter. There is a system in place that will take care of American interests. So this system could be happy sacrificing 2-3 President's legacy and popularity, if China and India could be halted. But that takes us into some Conspiracy Theory realm. As that would mean, America had a role in engineering the entire financial crisis impacting the entire World. Or it did not have any role, but once the crisis broke out, it used the opportunity to bring China and India to its knees. I might vote for the latter CT than the former CT.

Rich can exist, only if poor exist.

abhischekcc · Post by **abhischekcc** » 07 Aug 2011 20:21

If we are going to have de-globalisation, and the center of the global economy is going in meltdown, I suggest India does these things to immediately benefit:
1. Derecognize all IP held by foreign countries

2. Default on all external obligations

SwamyG · Post by **SwamyG** » 07 Aug 2011 20:57

^^^
Why not capture some lands with rich resources

Shankk · Post by **Shankk** » 07 Aug 2011 22:06

I would say more realistic benefits that are non disruptive can be accrued in terms of getting infrastructure related equipment and possibly technology if done properly. This can be done even in the case of attempted de-globalization. Weakness in Euro zone can provide some incentive for them to trade huge construction related equipment at a reasonable price just to get in some much needed cash. They may even be ready to do technology transfer full or limited if India offers right incentives.

Neshant · Post by **Neshant** » 08 Aug 2011 00:52

Lets hope this is not a sign of things to come..

-----

Fernando Aguirre, a first hand witness of the economic disaster & collapse of Argentina's economy & currency in 2001 due to over-indebtedness. Author of "Surviving the Economic Collapse" Fernando tells chilling stories of bank closures, life savings lost, & starving people slaughtering cattle on public roads just to survive.

His book : Surviving the Economic Collapse

The audio interview :
http://www.contraryinvestorscafe.com/wp ... guirre.mp3

devaraj_d · Post by **devaraj_d** » 08 Aug 2011 00:54

Neshant wrote:
devaraj_d wrote:I do not know from where you got 5,10 or 20 years but there are many examples where it has taken longer. The basic crank arrangement of the commonly available engine (i.e ignoring rotary and other designs) has not changed since more than a century. Edison tried to build an electric car and look what we are trying to do now. It does not mean we can blame the people who worked on these. The time taken to solve a problem will depend on complexity, inertia (obviously I am not talking about mass here but other factors), boundary conditions, patent situation, manufacturability, validation lead time, supplier lead times, economics, technology availability and maturity and so forth.
Nothing will take 10 or 20 years to complete. You need to erase that from your mind. All that's needed are competent people to get the job done.

It might take 20 years to get top notch brand recognition i.e. to become a Toyota. Needless to say that isn't the aim of any company starting out right off the bat.

I gave you specific examples from my experience and from past history to show how long it takes for changes to happen. No offense, but from your comments (such as cars are not complex) show lack of engineering judgment and little understanding of reality which is why I was very curious to know what work you did.

It took nearly 19 years for Shigeo Shingo to perfect SMED. It took nearly 18 years for an aircraft dropped anti tank (CBU 100?) weapon to be developed. Even if you have the best people complex systems will take time. Moreover having the smartest people does not always guarantee sucess (but this is an entirely different topic).

It took decades for Toyota (not 20 years as you mentioned) to reach where they are now. Even with all the problems that they faced recently it still is a great company. Why should not some one try to be like Toyota right off the bat? Toyota Production System has gone beyond automotive companies into other unrelated sectors as well.

If you give me specific examples of how something complex (except IT and semiconductor industry) was accomplished in a very short time frame in India I can then understand your basis of arguments. Otherwise I am not understanding where you are getting those time lines.

Neshant · Post by **Neshant** » 08 Aug 2011 00:57

While there may be a QE3, I've not sure if Monday's anticipated dip will be a buying opportunity. For one thing, all the talking heads on TV are saying its a buying opportunity which makes me think there's another dip coming after an initial pop.

Neshant · Post by **Neshant** » 08 Aug 2011 01:18

devaraj_d wrote: If you give me specific examples of how something complex (except IT and semiconductor industry) was accomplished in a very short time frame in India I can then understand your basis of arguments. Otherwise I am not understanding where you are getting those time lines.

As I said, you need to erase from your mind the idea that things take 20 years to finish because they don't. I've been on teams where an entire rather complicated product was built by a team of 6 (competent) people and I've been on projects where even with 50 guys on the force, things moves at a glacial pace. The difference is one of bad management and/or incompetent people.

Unless its deep level R&D like some particle physics discovery or something wholly revolutionary that hasn't been done before, nothing is a 20 year process. Needless to say a workable, decent car isn't something years ahead of its time. It does not fit in that category as its largely a medium tech item.

There may be some issues with getting around patents which major manufacturers might have filed up the wazoo but again its not something insurmountable from the engineering prespective. Maybe from the chemistry prespective with catalytic converters and such but I'm largely clueless in that area.

Once again, get rid of the idea of the 20 year saga or you'll never progress. 20 years of guys sitting around sipping coffee and dragging their feet is not a model of development you should have in your mind. Anything you aim to develop should start with an interm goal of a rapid prototype to get a somewhat working version of a gizmo and then improve on it (rapidly) thereafter with trials and end user feedback.

Airavat · Post by **Airavat** » 08 Aug 2011 07:19

G-7 conference call for stability

The G-7 group held an emergency conference call to discuss the debt crisis in Europe and market prospects following the announcement of the first-ever downgrade of the credit rating of the U.S. government. U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke participated in the G-7 call. The G-7 statement did not specifically address the decision by credit rating agency Standard & Poor's to lower the U.S. credit rating a notch from AAA to AA+.

The statement said the United States had "adopted reforms that will deliver substantial deficit reduction over the medium term." The G-7 statement also said the group would be alert for any indications of "excess volatility and disorderly movements" in exchange markets. "We will consult closely in regard to actions in exchange markets and will cooperate as appropriate," the G-7 said. On Sunday, the European Central Bank said it would "actively implement" a bond purchase program aimed at supporting Spanish and Italian bonds by driving down interest rates that have threatened both countries.

vera_k · Post by **vera_k** » 08 Aug 2011 08:49

2011 recession could be worse for India

Good summary of impacts on India. Given that the current account deficit is increasing, and FDI is down, exports and remittances would be key to keep the investment grade rating.

This other article says India will pitch for a ratings upgrade in November. This particular increase in borrowing cost would come at a bad time because the country needs to borrow a lot for building out infrastructure.

India to pitch for rating upgrade

Vasu · Post by **Vasu** » 08 Aug 2011 15:42

Hari Seldon wrote:Something's cooking. Smells funny too.

First, sample this:link

The ECB is not riding to the rescue because it can't. Any shock-n-awe rescue effort simply won't fly in the surplus EU core. The game's darn near up, I reckon. Italy is the 3rd largest bond market in the world, part of G-7 and all. Its way too big to save. checkmate, mite.

maybe counting the change took longer!

European markets mixed, ECB debt purchasing eases panic

European markets are mixed on Monday's early trading, supported by ECB and G7 efforts efforts to support Eurozone debt troubled countries, with the Central Bank buying Spanish and Italian debt, which has eased panic seen during Asian session.

Investors fears have been calmed by the ECB, which according to market sources has carried out an important purchase of Spanish and Italian bonds, triggering a sharp decline on both countries' debt yields. Spanish 2-year government bonds' spread with Germany tightened about 90 basis points to 3.49%, while Italian bonds spread narrowed more than 100 basis points to 3.51%.

[/quote]

Neshant · Post by **Neshant** » 08 Aug 2011 16:47

Korean Markets Halted after 7% decrease. breaking news on CNBC frontpage

Neshant · Post by **Neshant** » 08 Aug 2011 16:53

Not that credit rating agencies have any credibility but another downgrade will come in November.

SwamyG · Post by **SwamyG** » 08 Aug 2011 18:03

vera_k wrote:2011 recession could be worse for India

Good summary of impacts on India. Given that the current account deficit is increasing, and FDI is down, exports and remittances would be key to keep the investment grade rating.

India is not as exposed as other countries are to USA's treasuries. Economic Times had an article, it was 15th on the list.

Indian Economy Can Weather US Credit Downgrade, Says New Delhi
A lot of Indians are yet to be fully integrated with the Indian economy, let alone global economy.
US credit rating downgrade may impact India's IT, gems & jewellery exports: FIEO

Exports of garments, handicrafts, leather, gems and jewellery and IT are likely to be the most affected, the Federation of Indian Exporters (FIEO) said. Most of India's $50 billion of IT and services exports end up in the US.

Recession 2011: Goldman upgrades India rating on improvement in eco conditions

Citing expected improvement in macroeconomic situation, Goldman Sachs today upgraded India's rating to 'market weight', indicating bullishness in the short-term.

After maintaining an 'under weight' status on India for one year now, Goldman Sachs also cited lower oil prices and government's push for policy reforms for the upgrade.

"We upgrade India after a year at under weight, on a turn in the macro cycle, oil prices, valuation, and policy reform," it said in a research note.

Recession 2011: US crisis may hit but also benefit India, says FICCI

India will be impacted in the short term because of the US sovereign debt crisis, but it will also benefit from the economic turmoil as softening crude prices will bring down inflation, prompting the Reserve Bank of India (RBI) not to hike rates, a leading industry lobby said Monday.

India – a bright spot in a dark world

Now, however, India can aspire to join China, Indonesia, Malaysia and Taiwan in Goldman’s ‘overweight’ category. In the meantime, it can bask in the satisfaction of leaving ‘underweight’ laggards like Australia, Japan and Thailand behind.

vera_k · Post by **vera_k** » 08 Aug 2011 20:18

Some guy on CNN (was it the WSJ editor?) made the point that central banks around the world are under a lot of pressure as the politicians in many countries have abdicated their job.

The central banks were not built for this type of policy making, therefore they can be slow on the uptake, increasing the possibility of jarring mistakes.

I suppose Western countries could be served better if their courts were more like Indian Supreme Court, and able to rule from the bench.

devesh · Post by **devesh** » 08 Aug 2011 23:51

vera_k wrote:2011 recession could be worse for India

Good summary of impacts on India. Given that the current account deficit is increasing, and FDI is down, exports and remittances would be key to keep the investment grade rating.

This other article says India will pitch for a ratings upgrade in November. This particular increase in borrowing cost would come at a bad time because the country needs to borrow a lot for building out infrastructure.

India to pitch for rating upgrade

considering the amount of money going to swiss banks and stashed away in black money, it is a disgrace. if even a 10% of that money becomes accountable, we'll have no deficit, and will even make a surplus....

ramana · Post by **ramana** » 09 Aug 2011 01:31

Dow falls 630 after downgrade

The worst part is it went down 150 points after BO pep talk.

Reason per Bloomberg commentator is he didn't know what he was talking about.

My view is he should have let his Treasury Secy talk the details. Lets see tommorrow.

Wonder if this fall will take Asia and EU further down in a spiral.

Ambar · Post by **Ambar** » 09 Aug 2011 02:13

some of the valuations are mouthwatering at these levels, but then again in a market as irrational as this one who knows what the right valuation is! The problem with Obama's speech was that he said nothing new. It should be an interesting day in Asia tomorrow, i expect triggers to shutdown markets in several countries.

ramana · Post by **ramana** » 09 Aug 2011 02:17

X-posted....

Prem wrote:Deven Sharma - The Jharkhand boy who downgraded US

http://economictimes.indiatimes.com/new ... 523556.cms

MUMBAI: About four months after MS Dhoni's boys won the Cricket World Cup for India, another man from Jharkhand has now shook up the world. On August 5, Standard & Poor's, led by Jharkhand-born Deven Sharma, struck off the 'AAA' rating of the US, considered the Gold standard in the world of finance, for the first time since 1914. On that Friday afternoon, S&P officials told Barak Obama's treasury department that the ratings major's analysts have come to a decision that the US no longer deserves to be among the best rated countries in the world. After six hours and a flurry of emails, phone calls and conferences between top officials in the Obama administration and Sharma's team of number-crunchers, the world got to know of the unprecedented move - something that was in the air for a few months but which appeared more like a distant possibility: The US' country rating was downgraded one notch to 'AA-plus'. And suddenly the 57-year old Sharma was in the spotlight, hailed by a select few, but criticized by several in the financial world.
Born in 1955, Sharma was educated in Jamshedpur and Ranchi, and then moved to the US for his masters degree at Wisconsin and his doctoral degree in management from Ohio in 1987. During his initial years, he was in the manufacturing sector, working with Dresser Industries and Anderson Strathclyde. In 1988, he joined Booz, Allen & Hamilton, a global management consulting firm, where he spent 14 years. In 2002, he joined The McGraw-Hill Cos, the parent of S&P. Sharma took over as the president of S&P in August 2007, just when the sub-prime crisis in the US housing sector was getting out of hand, and credit rating agencies were picked as one of the perpetrators of the meltdown for their flawed ratings models of housing loans. Over the last four years as the head of one of the foremost rating agencies in the world, Sharma has faced several US Congressional grillings, but has negotiated most of those with much elan, people who have followed him closely say. In a recent interview, Sharma admitted that over the last four years, comments made by US lawmakers have changed to appreciation from strong criticism.

ramana · Post by **ramana** » 09 Aug 2011 02:49

S&P botched its story....

....

Earlier: One amusing aspect of the S&P downgrade fallout--at least for those familiar with the way all financial "ratings" work--is how normal this whole process has been.
Anytime an analyst considers downgrade a beloved, sacred-cow rating, the following things happen:

• Everyone freaks out at the analyst's company, knowing how much crap they'll all get from the downgrade and how many relationships will be hurt and how much business might be lost

• There are a series of tense internal meetings to discuss the downgrade

• The analyst defends the downgrade and the analyst's colleagues eventually become convinced or ask for more work to be done

• The analyst calls the "issuer" to discuss the logic behind the downgrade (without explicitly telling the issuer that the stock/bond will be downgraded--in part because the final decision hasn't been made yet).

• The issuer figures out instantly what's happening and completely freaks out.

• Management of the issuer try a range of desperate tactics to try to persuade the analyst not to downgrade.

• First incredulity ("Seriously? We're shocked. We can't imagine what you're thinking.")

• Then simple persuasion ("You're obviously wrong--please give us an opportunity to show you why you're wrong, so you don't embarrass yourself.")

• Then scientific logic ("Here's why you're wrong...")

• Then threats ("Obviously you don't understand our industry. Obviously you understand what this means about our relationship. Obviously we'll defend ourselves.)

• Then begging and pleading for time ("Obviously this is a huge call that will shock and hurt a lot of people. What we'd recommend is that you take a few more days to evaluate this situation.")

• And so on...

Then, if the analyst/firm decides to go ahead and downgrade, the fallout is usually quite similar to the fallout around the S&P downgrade:

• Everyone with an interest in preserving the old rating--issuers, investors, etc.--shreds the analyst/firm in every way possible: The analyst is an idiot. The analyst is carrying a grudge. The analyst is wrong. The analyst made a massive mistake. Etc.

• The issuer publishes a press release denouncing the analyst and explaining why he/she is wrong.

• The press plays up the denouncing, usually concluding that the analyst is an idiot.

• Everyone grumbles for a while

• Eventually, either the analyst is proven right and everyone else downgrades and the stock or bond craters...or the analyst is wrong and eventually falls on his/her sword and upgrades again

• Life goes on

This latter process--the impeachment of the analyst--is made much easier if the analyst has made a mathematical or other simple error in expressing his/her downgrade logic (as S&P just did, with its $2 trillion mistake). This gives the issuer something to harp on in all its outrage.

But the issuer harping on a "mistake" made by the analyst is almost always a sideshow. A key part of creating any "rating" on a security is evaluating the future, and the future cannot be evaluated precisely. And the truth is that there's no precise difference between an AAA rating and an AA+ rating (or a "Buy" or "Hold"), at least not one that can be proven with an honest assessment of future scenarios.

So, ultimately, no matter who or what is involved, the rating process contains significant subjectivity. Ratings are opinions, not facts, and analysts are entitled to have opinions that are different than those held by "management."

In other words, the S&P downgrade is playing out the same way pretty much any other big downgrade plays out, albeit at 100-times the scale. S&P blew it big-time by making that boneheaded $2 trillion mistake. In so doing, they gave the Treasury something to seize on while ridiculing them, one that will persuade a lot of people that S&P is just incompetent (or politically motivated).

But the downgrade itself was perfectly justified, and the Treasury knows it.

In the past 10 years, the US has gone from a budget surplus to a $1.4 trillion deficit and piled up $14 trillion of debt, with deficits and borrowing continuing as far as the eye can see. Meanwhile, the US government has become paralyzed by ideology: Only a week ago, a meaningful portion of the government was willing to put the US into default just because they weren't getting EXACTLY what they wanted in the budget debate.

Those two facts alone are more than enough logic to support a downgrade. (And it's also worth noting that they are the fault of the entire government, and prior governments, not just the current Administration.)

Treasury knows this. S&P knows this. And any sentient being who has been paying attention to the US's fiscal situation in recent years knows it.

But that won't derail the downgrade side-show, in which everyone seeks to deflect the blame.

g.sarkar · Post by **g.sarkar** » 09 Aug 2011 10:08

http://www.spiegel.de/international/wor ... 08,00.html
08/08/2011
Debt Crises and Market Turmoil
Is The World Going Bankrupt?
By SPIEGEL Staff
"Europe and the US are hopelessly over-indebted. The crisis that started in the US real estate sector in 2007 has devastated state finances on both sides of the Atlantic and is threatening to wreck the euro and trigger a second global downturn. The world lacks the political leadership needed to end the turmoil.
The fear is back, in the stock exchanges and in the capitals of the industrial nations. There are growing signs everywhere of a new financial crisis, and the political leaders of the West are looking helpless and out of their depth.
The United States is struggling with an enormous budget deficit. And the euro zone's central bankers and government leaders can't find a strategy to end the permanent malaise of their single currency. The White House has achieved little more than to buy some time with a new debt compromise reached after theatrical political squabbling between Democrats and Republicans. Last Friday night, rating agency Standard & Poor's lowered its rating for the US from AAA to AA+.
Muddling through, postponing, playing down -- the motto of the crisis managers on both sides of the Atlantic has sent alarm bells ringing in stock markets. Britain's Economist magazine is warning of a double-dip recession in the US, a second downturn just three years after the last one. Many economists have been pointing out that last week's panic resembled the fear that swept financial markets after the collapse of US investment bank Lehman Brothers in September 2008.
Then as now, banks stopped lending each money. Then as now, banks' cash deposits at the central bank doubled within days. The European Central Bank reacted by assuring banks of unlimited liquidity in the coming months. It was an emergency measure that led to short-term relief but sparked anxious questions among bankers and stock market players. How long can the central bank keep up its market-soothing liquidity operations before it finally loses its credibility, the most important asset of a central bank? Is the financial crisis about to escalate? And will the world then be bankrupt?......."
Gautam

Neshant · Post by **Neshant** » 09 Aug 2011 11:06

abhischekcc · Post by **abhischekcc** » 09 Aug 2011 11:18