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GBR Market Wrap: S&P Issues Unprecedented Downgrade of U.S. Credit Rating

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In this Week’s Issue: Aug. 5, 2011

Weekly Snapshot

• S&P issues unprecedented downgrade of U.S. credit rating from AAA status to AA+ (AP)
• U.S. economy adds 117,000 jobs, unemployment drops to 9.1% (Reuters)
• Yields on U.S. 10-year Treasury Notes fell below 2.5% on Thursday (Bloomberg)
• Spot Gold rallied to a new record high of $1,681.90 on Thursday (Reuters)
• Money market funds in the U.S. saw a $103-billion outflow amid debt drama (LA Times)
• The European Central Bank held interest rates steady at 1.5% (
• Japan sold one trillion yen ($12.5 billion) in efforts to tame currency appreciation (Reuters)
• The Euro area seasonally-adjusted unemployment rate was 9.9% in June 2011 (Eurostat)
• U.S. service firms experienced their weakest growth in 17 months in July (AP)
• Global manufacturing output has dropped back to the level it was at two years ago (Economist)
• Swiss National Bank cut interest rates in a move to cap a soaring Swiss Franc (Reuters)
• Ratings agencies Moody’s and Fitch have confirmed the U.S. will keep AAA rating (Reuters)
• U.S. Senate authorized a bill to raise the debt ceiling by $2.4 trillion (AP)

Market Barometers



Weekly Chart

Every now and then, the markets leave you speechless. This was one of those weeks. There was hardly any place to hide except for Treasuries and a rather choppy Gold in an ongoing flight to safety. So is there really a place to hide? Despite the U.S. credit ratings downgrade by S&P, the markets still believe, at least until market close on Friday, that U.S. Treasuries are the safest bet among increasingly fewer choices.

In terms of equities, a lot of this week’s volatility had to do with technical trading factors. When the S&P500 fell through an important technical support at 1250, a level which everyone seemed to agree upon, sell orders were triggered and the markets headed South all the way to 1163 for the S&P 500.


From our perspective, the stock market sell-off is a concern. However, the larger issues are looming over the fate of the U.S. status as the largest, safest and most liquid capital markets. If the value of the Dollar continues to erode, any nominal returns in U.S. stocks will be eroded by returns measured in other currencies or other hard assets such as precious metals.


In the early ’70s it took over 4 Swiss Francs to buy 1 U.S. Dollar. Today, it takes less than 80 Swiss cents to buy 1 Dollar. At the same time, the yields on U.S. Treasuries are near historic lows, alarmingly close to the lowest yields we witnessed during the financial crisis. For now, there is no visible change in trend. U.S. Treasuries continue to stay within the long-term trend of super-low interest rates while the value of the Dollar against some other hard currencies continues to erode. It does however beg the question as to how much longer we can play this game of charades i.e. convince the world that this is the safest place to invest and, while incurring yet more debt, offering increasingly lower real returns.  This logic has defied me for some time now; it eventually defied Standard & Poors as well. Perhaps the historic downgrade from AAA to AA+ is another symptom of what has often been called the “new normal.” Perhaps reason will continue to take an extended holiday and real rates will continue to erode. A long time ago, someone said: “Hard to see the future is, the dark side clouds everything…”

While we cannot predict the future, we do know that the markets will continue to play out numerous scenarios in an increasingly complex and highly leveraged game of charades. Buckle up!

Really Banks, Really?
Speaking of twisted logic…for those who need a reminder that capitalism as we knew it has run its course, please consider:
BNY Mellon to charge on $50m-plus deposits

And in case you’re still in the camp of those who don’t hate banks enough already, this story will help you change camps.  Having been brought to their knees just a couple of years ago, the banks came begging asking taxpayers for bailout money. Now they are back to record bonuses, fewer of them and too bigger to fail, their CEO’s must feel vindicated and rightly so because the general public appears too complacent and lets them get away with murder. Don’t get me wrong, the majority of people who work for banks are decent and hard working. But the bank as an institution can no longer survive if it continues to slaughter its most important and possibly the only real cash cow: The customer.

Should we feel sorry for those with cash holdings of over $50M? Probably not, but this story speaks to the larger trend of banks holding our hard earned cash and instead of paying us a decent return on savings, they continue to find ways to charge fees. Why people aren’t in the streets yet and seriously call into question the existence of these greed-driven behemoths beats me.

George Orwell would have been proud of this kind of doublespeak BNY Mellon used in a letter to clients:

The “extraordinary deposits” meant that fees were necessary to safeguard the “quality and strength” of its balance sheet.

Really banks, really? In Greece, people took to the streets because their retirement age of 55 was at stake. In this country people have been swallowing up the misdeeds of a few highly paid at the top while continuing to work longer, harder, and for lower real wages. What else must people endure before a real run on the banks occurs?

Recommended Read

The battle over deficits and the debt ceiling is finally over, or is it?  Please consider: Washington’s battle is a diversion

Recommended Video

When talking about U.S. debt and about the future of the risk-free rate, one cannot forget the largest debtor’s biggest creditor: China. Please consider an insightful interview with Niall Ferguson: Ferguson Says China Saw Currency Risk in U.S. Debt Talks.

Ferguson video
Click on image to open in new window

Good luck and good investing!

Clemens Kownatzki, MBA is an adjunct professor of financial risk management at the Graziadio School of Business and Management, as well as the founder and CEO of FX Investment Strategies, a Registered Investment Advisor. In addition to running his investment advisory firm, he is a contributing author at and He also authored the book, Money Music 101, available on Amazon and Kindle, in addition to publishing the popular investment blog along with a weekly newsletter.Disclaimer

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Author of the article
Clemens Kownatzki, MBA
Clemens Kownatzki, MBA
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