Category Archives: fed

S & P Cuts U.S. Credit Rating Outlook To Negative, Proving They Are Clueless

S & P Changes Outlook to "Negative"

Many are cheering the S & P’s new “Negative” Outlook on the U.S. Credit Rating (which remains at AAA), the market is not taking it lightly – but all this proves is that the rating companies still have no idea what they are doing.  As if the subprime meltdown wasn’t evidence enough, the incoherent ramblings of the folks at S & P about the future of our debt situation confirm they don’t understand our monetary system.

In an ironic twist it is stocks tanking, not the bond market or the dollar.

I want to be clear that I do believe we have long term economic problems that are not being dealt with and that reckless spending in a balance sheet recession is not the answer.  But the United States can only default on their debt if its politicians make a political decision to do so.  There will not come a day where the United States cannot pay its dollar-denominated debts, unless our politicians simply refuse.

Our monetary system is different than that of Greece, Spain, Portugal, Ireland and other countries that do not issue their own currency.  The U.S. is the monopoly issuer of its own currency which means it can print dollars.

Warren Mosler, author of “Seven Deadly Innocent Frauds of Economic Policy” says the following:

“Governments, using their own currency, can spend what they want, when they want, just like the football stadium can put points on the board at will.  The consequences of overspending might be inflation or a falling currency, but never bounced checks.

The fact is: government deficits can never cause a government to miss any size of payment.  There is no solvency issue. There is no such thing as running out of money when spending is just changing numbers upwards in bank accounts at its own Federal Reserve Bank.”

There are certainly huge risks to running massive deficits, especially when those deficits are inept and unproductive.  But there is no risk that the United States could not pay its debts denominated in U.S. Dollars….unless politicians make an election to do so.  Once again the rating agencies have demonstrated they don’t know what they are talking about (in this case it is the S & P, Moody’s has not changed their outlook, but they did so once in 1996).

Scott Dauenhauer, CFP, MSFP, AIF

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CNBC: Cheeseburger Markets

 

 

Cheeseburger Stock Market

I rarely link to CNBC articles, but this one by Jeff Cox “For Investors, Missing Rallies, Not Taking Losses, The Biggest Fear” is worth a read.  Here is the gist:

Consider the stock market to be a triple bacon cheeseburger with extra cheese, extra bacon and extra special sauce, complete with a super-sized order of fries on the side: A delicious meal, to be sure, but hell on the arteries and waistline.

Then consider investors to be the customers at our little fast-food bistro. They know coming here to eat could be extremely hazardous to their health, but they just can’t resist the lip-smacking gastronomic goodies being whipped up in the kitchen, which we’ll call the QE Cucina.

Perhaps the best line:

This is the market of guilty pleasures, where the only fear is that the lard, butter and deep fat fryers will be replaced someday with soybeans, broccoli and woks. As long as the goodies are being served up—in Wall Street’s case the liquidity provided from the Federal Reserve amid a backdrop of tepid improvement in some aspects of the economy—the lines at the restaurant will remain long and the food continue to be served.

It seems as though nothing can bring down this market, no amount of bad news.  What is more disturbing is how many people are using metrics with no real historical value to determine that the market is undervalued or cheap?  Everything these days is “relative to ‘insert asset class’ stocks are cheap”, yet when the measures being used are openly manipulated by the Federal Reserve – are they really useful?

Doug Short at his blog keeps track of different measures of market valuation at his monthly updated page “Is The Stock Market Cheap”.  Spend a few minutes on his site and you may come to a different conclusion about the “cheapness” of the market.

The article ends with:

The cheapness of stocks in an environment of very little economic growth is highly debatable, but it’s a debate for which there is little appetite on cheeseburger-chomping Wall Street.

“I’ll worry about it tomorrow” is the Scarlett O’Hara-esque attitude of investors, Art Cashin, director of floor operations at UBS, told CNBC. “The market seems to shrug (worries) all off. It wants to go higher. It is money looking for someplace to go.”

Investors who are valuation sensitive should be weary right now.

Scott Dauenhauer, CFP, MSFP, AIF

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>Does The Fed Even Understand Monetary Policy? Evidently Not

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The United States is on a fiscal path towards insolvency and policymakers are at a “tipping point,” a Federal Reserve official said on Tuesday.

“If we continue down on the path on which the fiscal authorities put us, we will become insolvent, the question is when,” Dallas Federal Reserve Bank President Richard Fisher said in a question and answer session after delivering a speech at the University of Frankfurt.

Setting aside the massive budget deficits and whether or not fiscal austerity is a good/bad idea – its frightening that someone so powerful doesn’t appear to understand our monetary system.

The United States is the sovereign monopoly issuer of its own non-convertible currency, it can not become “insolvent”. The US has the ability to spend by crediting accounts (unlike states or european nations on the Euro) and thus is never fiscally restrained. This doesn’t mean the US can spend at will with no consequences.

Is it possible Fisher does not know this?

Scott Dauenhauer CFP, MSFP, AIF

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