State of the Economy – August 2011 (S&P downgrade)


What a start to the week. Insaneness! First we get a market expectations exceeding jobs report. Three times what analysts expected in new jobs creation. Fortune 1000 companies have been systematically pushing out market expectations exceeding quarterly earnings reports. The July Beige Book Report showed moderate growth across all the districts. And then a downgrade.

S&P move to down grade US credit rating was ‘interesting’ to say the least. Moody’s on the other hand smartly kept the AAA rating in place. S&P still has a triple-A rating on Australia, Austria, Canada, Denmark, Finland, France, Germany, Netherlands, Norway, Singapore, Sweden, Switzerland and the United Kingdom. Where will the trillions in funds move from the dollar? Euro with Greece, Italy, Spain, Portugal and Ireland? Swiss Francs, backed by what? Or maybe the British Pound. Heck, let’s move it all to gold… at $1700+ per oz. As Warren Buffett said, US credit is still AAA and nations will want to buy US debt at AAA rates. The only thing that S&P managed to achieve was to erase about 6% off the DOW.

The S&P move may have poured enough fuel on the flames of irrational panic to push the fragile world economy into a second recession. Some pundits are writing that a second recession would be more devastating than the last, as the economy doesn’t have enough buffer. Recession is a market correction. What is there left to correct? Is the expectation that Congress will push for harsh soft to medium term austerity measures, which would kill growth? Yeah, that would be real popular. Stock prices are reflective of earnings potential. Corporations are streamlined and have no need for massive lay offs to purge years of excess.The consumer credit markets can’t get any worse than it already are. What the S&P move did was psychological and impacted confidence. Market and consumer confidence go hand in hand. Loss in a consumer confidence may have a bubble up effect through manufacturing across the economy and maybe might even push us into a recession. When the consumers see that the sky isn’t falling and the sun keeps rising every morning they will call down… can’t have Christmas without presents. No presents if Santa’s factories don’t kick up production. Santa wont fire elves when he knows that those elves will be needed in a couple of months. Something that would give consumers a confidence boost would be a showing of strong bipartisan congressional leadership. On the flip side… 15 months more shenanigans could be devastating.

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