Monday, April 18, 2011

Even More Commentary on S&P's U.S. Credit Rating Warning

Earlier, Real Time Economics had the econ types. Now their fellow Murdochians* at MarketBeat bring on the analysts:
The commentary keeps coming, with every market watcher and their aunt Sally offering their two thoughts on what S&P surprise cut of its outlook for the U.S. debt rating from “stable” to “negative.” (The credit rater left Uncle Sam’s AAA rating intact.)
  • Barclays Capital: It is important to be clear on this. If the U.S. government were to default on its obligations, a very large financial panic is what we’d get. But as the saying goes, once they’ve exhausted all the other alternatives, US politicians can usually be relied on to do the right thing – and S&P’s move might actually serve as a reminder of what that right thing is. Just as it took two attempts for the US legislature to pass the TARP and save the world, so now we may need to be braced for a prolonged period of brinkmanship before a budget deal gets done.
  • George Goncalves, Nomura Securities: We believe that although this news does bring to the forefront the longer-term profligacy of the US, this is something we’ve highlighted several times as a concern and is widely acknowledged by the market. To that extent, aside from the knee jerk reaction, this downgrade contains little new info. The most salient issue for Treasuries currently is the extension of the debt ceiling in the next few months and that is likely to have a greater impact in the near-term than 2012-2013 budget discussions. We had mentioned in the past that fiscal austerity measures needed to be passed, but that these weren’t pressing concerns, given the reserve currency status of the USD. We believe it will be a slow and drawn out process before foreign central banks can start investing their trade surplus reserves in any other currency. Until we reach that point (which is many years away, even by conservative estimates), sponsorship for USTs will continue to be strong from this demand segment....MORE
*The Wall Street Journal was awarded its first Pulitzer (pronounced: pull-it-sir) since Mr. Murdoch bought the paper in 2007.

Back to the analysts, FT Alphaville has been giving Nomura's resident ursi a listen-to for years and devoted a post to him today:

Bob Janjuah – told you so America
Nomura’s sceptical strategist Bob ‘the bear’ Janjuah is feeling very pleased with himself, following S&P’s decision to revise its long term outlook on the USA to “negative”.
As well he might.

Only last week Bob wrote the following:
We think QE3 will be both unavoidable and a grave policy mistake in the hard landing outcome. We think it (QE3) is unavoidable because under this outcome, where we expect a significant slowdown in global growth in H2, driven by an EM slowdown and an end to the global super-cycle in manufacturing, it is the only „stimulative‟ policy option left, and Bernanke and Obama both seem fixated with stimulus, at any cost it seems….
… We find it extremely worrying that over the mid-February to mid-March global equity sell-off, where the drivers of the sell-off were not particularly US-centric, the US dollar nonetheless sold off over this period. This is the exact opposite of what has been seen for more than the past two years, and not what the market expected. We worry that it may reflect growing concerns about the US sovereign and US policymakers who may now be turning into the central risk. If this is the case, and, as a result of QE3 the US dollar and US Treasuries become unanchored and are no longer seen as the world‟s risk-free assets nor as the ultimate stores of value, then the entire foundations for valuations in financial markets could be at risk
Tell ‘em what you really think, Bob....MORE
A smattering of our Janjuah posts, the first two while he was at RBS (if only they'd listened):
June 2008
Royal Bank of Scotland: Global Stock and Credit Crash Alert

The next is not as prescient but has two of my favorite links**:

Sept. 2009 
"Eat your heart out Albert Edwards": Royal Bank of Scotland Calls for 550 S&P (and: "South Sea Bubble Redux")

Finally his Feb. 2, 2011 call to which I responded "I think he's early...":
Nomura's Bob Janjuah: QE2 Has Run It's Course, "Time to Fade Jackson Hole"

He caught one down move within 16 days and is virtually flat over 75 days:
The S&P closed at 1304.03 on the 2nd and powered its way to 1343.01 in Feb. 18 before turning down. It then headed pretty much straight down to 1256.88 on March 16. The index closed at 1305.14 today.
Nyah, nyah, nyah, nyah, nyah.
[please grow up -ed]

**South Sea Bubble Survivor Says Dismantle RBS Along With Lloyds
From Bloomberg:
Henry Hoare made a 1.6 million- pound ($2.2 million) profit [*] from the South Sea Bubble, a speculative bust that bankrupted thousands of English families in the 1720s. His great-, great-, great-, great-, great-, great-grand- nephew boosted the deposits of his family’s bank by 20 percent in the past year to come through one of the worst financial crises since then, which is why people might want to listen to him.
“Keep it simple, stupid,” Alexander Hoare said in an interview in his drawing room on the first floor of C. Hoare & Co.’s 180-year-old office on London’s Fleet Street. “Get the depositors in, lend to people who can afford to borrow.”
That’s a lesson Royal Bank of Scotland Group Plc should have learned, said Hoare, 46, whose family-owned firm started in 1672 and now has about 10,000 customers....MORE
HT: FT Alphaville who headlined their linkpost "Esoteric headline of the day"
**From deep in the link-vault comes a tiny treasure, an analysis of Hoare's trading during the South Sea bubble (15 page PDF):

Riding the South Sea Bubble
This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare’s Bank, a fledgling West End London bank, knew that a bubble was in progress and nonetheless invested in the stock: it was profitable to “ride the bubble.” Using a unique dataset on daily trades, we show that this sophisticated investor was not constrained by such institutional factors as restrictions on short sales or agency problems....MORE
As pointed out in Friday's "Markets: Where Do We Go From Here?", we are firm believers in the low I.Q. approach to business.