Dear investors and jittery friends,
Like many people, you must be nursing some doubts and anxieties based on the overwhelming information on what’s happening in the US and global markets, following S&P’s downgrading US currency from AAA to AA+. I’ve attached some articles to support the following train of thought.
Let me break it down for you :
The real impact is uncertain as it will be largely sentiment-driven. Reason is S&P is merely confirming what the world has known for a long time and what China’s Xinhua News Agency coined very accurately in its editorial on Saturday:
"To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means.It hould also stop its old practice of letting its domestic electoral politics take the global economy hostage and rely on the deep pockets of major surplus countries to make up for its perennial deficits."
The second alternative is for Eurozone countries to go for some sort of fiscal union, in which the stronger countries guarantee the debts of the weaker economies. Politicians find both alternatives too radical to contemplate, and so preferred one fudge after another.
Markets Apprehensive
The markets can see this, and so are apprehensive. Yet fudging is indeed possible for quite some time. Voters in Germany and some other northern countries are dead against repeated rescues of what they regard as the profligate and ungrateful south. So a formal fiscal union of all Eurozone countries is impossible.
But it is entirely possible for the weaker countries to be given the right to issue Eurobonds - bonds guaranteed by all countries of the European Union. Since Germany and France are among the guarantors, the bonds will be seen as safe, and interest rates will come down to sustainable levels. This fudge can continue for years before the contingent liability of the northern countries begins to look excessive.
No double-dip recession but Europe a worry: Greenspan
WASHINGTON | Sun Aug 7, 2011 1:50pm EDT
(Reuters) - Former Federal Reserve Chairman Alan Greenspan on Sunday downplayed the risk of a double-dip recession in the United States, saying its domestic economy was in better shape compared to its European peers.
A double-dip recession "depends on Europe, not the United States," Greenspan told NBC television's "Meet the Press." "The United States was actually doing relatively well -- sluggish, but going forward -- until Italy ran into trouble."
The U.S. economy stumbled badly in the first half of 2011 and came dangerously close to contracting in the January-March period, raising fears that the economy was sliding back into recession.
Those fears were calmed somewhat last week when a debt deal was agreed before the August 2 deadline as well as data showing that employers added 117,000 jobs in July. But Standard & Poor's downgrade of the country's top-notch "AAA" credit rating late on Friday to "AA+" could hurt the recovery.
"With all of this bickering going on, the economy is slowing down," Greenspan said. "You can see it in all the data. I don't see a double-dip, but I do see it slowing down."
Europe, which buys a quarter of U.S. exports and houses the operations of many American companies, would determine the course of the U.S. economy's recovery, Greenspan said.
European leaders are struggling to contain a sovereign debt crisis, which has spread to Italy, the euro zone's third-largest economy, and is causing turmoil in global financial markets.
Greenspan said Italy's troubles could contribute to destabilizing the European and U.S. economies.
"When Italy showed signs of significant weakness in selling its bonds ... it created a massive problem within Europe because Italy is a very large country that ... indeed cannot be bailed out," he said. "And that's what's causing our problem."
Greenspan said despite the S&P downgrade, U.S. Treasury bonds, unlike Italian bonds, were still a safe investment.
"This is not an issue of credit rating. The United States can pay any debt it has because it can always print money to do that. There's zero probability of default," he said. "What I think the S&P (downgrade) did was to hit a nerve. ... It's hit the self-esteem of the United States, the psyche. And it's having a much profounder effect than I conceived could happen."
Markets in the Gulf region and in Israel, among the first to trade since the U.S. credit downgrading, tumbled on Sunday amid worries the U.S. downgrade and European debt woes may trigger another global downturn.
Greenspan said the same was likely to happen worldwide when global markets open on Monday
Barclays: Some Short-Term And Long-Term Implications Of The Downgrade
Joe Weisenthal
Realistically, nobody knows exactly what impact the S&P downgrade of US sovereign credit from AAA to AA+ means.
But it'd be boring and foolish not to guess.
Here's a snip from a note from Barclays' Ajay Rajadhyaksha.
First, the near-term implications:
Investor sentiment is clearly fragile after the drop in all risky assets over the last several days. But the near-term impacts of this one-notch downgrade should be minimal for the US bond markets, in part because sentiment is so fragile.
· We do not anticipate forced selling of US Treasuries from any significant investor base. Foreign central banks maintain a large share of their FX reserves in USTs because it is the deepest and most liquid bond market. This is unlikely to change due to a ratings downgrade. Mutual fund investment guidelines retain significant flexibility regarding the handling of this action. The US banking system should not be forced to sell as well because the Fed has issued a guideline noting no change in risk weights. Similarly, insurance companies are also unlikely to be forced to sell as the NAIC has already de-emphasized ratings for regulatory capital requirements.
· Haircuts in the repo market may rise but since haircuts or margins are meant to protect cash lenders from daily price fluctuations in the collateral, they are more likely to depend on changes in price volatility of Treasuries, rather than just a downgrade in itself.
· Similarly, in the derivatives market, most CSAs do not explicitly draw a link between the eligibility of US Treasuries as collateral and their AAA rating. In addition, given that major US banks are several notches below AAA, a single-notch downgrade should not lead to downgrades in the credit ratings of banks. Even if that were to occur, additional collateral requirements would be manageable in our view.
And then some long-term implications:
Being the world's reserve currency seems incongruous with a AA rating. The longer-term effects are driven primarily by whether markets eventually also downgrade the US. In that case, the biggest impact should be through the effect on the USD as a reserve currency.
· Based on prior research, we believe that a one-notch downgrade would lead to an increase of 25bp in borrowing costs. But this is not a function of a specific rating action, but of the market downgrading the sovereign rating.
· A downgrade could increase diversification away from the USD. Foreign investors have supplied 30-40% of non-financial credit creation in the US over the past few years. An increase in the pace of diversification should be an economic drag, as domestic savings would have to rise to pick up the slack
Templeton's Mobius sees high degree of uncertainty, volatility
Written by Reuters
SINGAPORE: Mark Mobius, executive chairman of Templeton Emerging Markets group, said on Sunday he sees a high degree of uncertainty and volatility in financial markets in the wake of Standard & Poor's decision to downgrade the U.S. credit rating.
Mobius warned that the U.S. dollar's role as an anchor to the global investor community was deteriorating and said emerging market currencies and stocks could become safe havens.
"The initial reaction will be a high degree of uncertainty and thus volatility since investors will not know where to turn for safety," said Mobius, whose unit oversees $50 billion in emerging market assets.
"During the sub-prime crisis safety was in U.S. Dollars and U.S. Treasuries. Now that anchor to the global community is deteriorating," he said in an email to Reuters. – Reuters
Like many people, you must be nursing some doubts and anxieties based on the overwhelming information on what’s happening in the US and global markets, following S&P’s downgrading US currency from AAA to AA+. I’ve attached some articles to support the following train of thought.
Let me break it down for you :
The real impact is uncertain as it will be largely sentiment-driven. Reason is S&P is merely confirming what the world has known for a long time and what China’s Xinhua News Agency coined very accurately in its editorial on Saturday:
"To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means.It hould also stop its old practice of letting its domestic electoral politics take the global economy hostage and rely on the deep pockets of major surplus countries to make up for its perennial deficits."
Good sense must prevail. The investing community need to (as the Chinese would agree) continue to STICK TO the FUNDAMENTALS of INVESTING.
Let me break it down further for you:
1. If you are an EPF investor, and you’re below 50, that means you have a long term horizon for your investment – THIS IS CHEAP SALE TIME. We have been waiting for this cheap sale FOR A LONG TIME. It’s time to buy now and accumulate units of your tested and proven high performance funds.
2. If you are an EPF investor aged 53-54 and close to retirement ie. needing your EPF invested money entirely in the next 12 months – you would already have exited the market as we would have advised you to be cautious.
Reminder: your EPF invested amount comes from your Account 1, touchable only when you’re 55.
3. If you are a lump sum or regular cash investor and need your cash in the next 12 months, it’s also a time to exit as caution is a better play.
4. If you are a lump sum or regular cash investor and your investment horizon is in 3 -5 years and above, THIS IS CHEAP SALE TIME. We have been waiting for this cheap sale FOR A LONG TIME. It’s time to buy now and accumulate units of your tested and proven high performance funds.
1. If you are an EPF investor, and you’re below 50, that means you have a long term horizon for your investment – THIS IS CHEAP SALE TIME. We have been waiting for this cheap sale FOR A LONG TIME. It’s time to buy now and accumulate units of your tested and proven high performance funds.
2. If you are an EPF investor aged 53-54 and close to retirement ie. needing your EPF invested money entirely in the next 12 months – you would already have exited the market as we would have advised you to be cautious.
Reminder: your EPF invested amount comes from your Account 1, touchable only when you’re 55.
3. If you are a lump sum or regular cash investor and need your cash in the next 12 months, it’s also a time to exit as caution is a better play.
4. If you are a lump sum or regular cash investor and your investment horizon is in 3 -5 years and above, THIS IS CHEAP SALE TIME. We have been waiting for this cheap sale FOR A LONG TIME. It’s time to buy now and accumulate units of your tested and proven high performance funds.
Recession 2011: No double-dip recession; US to emerge unscathed
WASHINGTON DC: Relax: the world is unlikely to plunge into a double-dip recession, notwithstanding the crash in global stock markets and the US loss of AAA rating from Standard & Poor's. However, the global economy is slowing down, and slow global growth may persist for years - this typically happens when a recession arises from a financial crisis.
The fall in stock markets looks more a buying opportunity than the start of another slide to recession levels. US politicians managed to increase the country's debt ceiling on August 2 just in time to avoid technical default. The stand-off between Democrats and Republicans was seen by alarmists as political paralysis with grave future portents.
In fact, it was political theatre, a variation of a similar drama that played out in 1995. Remember, the conflict between Mukesh and Anil Ambani over their industrial inheritance was terribly bitter, but nobody thought for a minute that it would lead to Reliance defaulting on its debts.
The same holds for the US: partisan battles can be bitter and can lead to gridlock, even technical default, but not to real inability to pay up. Even if the US had technically defaulted by being unable to issue cheques for a few days - as actually happened in 1995 - nobody doubted that the cheques would become cashable with a small delay.
Indeed, in the past few days global investors have exited emerging markets and rushed into dollars as a safe haven. That underlines the point that, no matter how big the problems of the US may be, no other country looks a safer haven. Investors may desire an alternative to the American dollar as the main global currency, but neither the euro nor yen look remotely capable of taking its place.
The US remains unrivalled in its innovation and academic strength. The problems of Europe are deeper. The Eurozone was created as a monetary union of European countries without a corresponding fiscal union. This has turned out to be unsustainable. One alternative is for the weaker countries of southern Europe to abandon the euro and regain flexibility over their own currencies.
WASHINGTON DC: Relax: the world is unlikely to plunge into a double-dip recession, notwithstanding the crash in global stock markets and the US loss of AAA rating from Standard & Poor's. However, the global economy is slowing down, and slow global growth may persist for years - this typically happens when a recession arises from a financial crisis.
The fall in stock markets looks more a buying opportunity than the start of another slide to recession levels. US politicians managed to increase the country's debt ceiling on August 2 just in time to avoid technical default. The stand-off between Democrats and Republicans was seen by alarmists as political paralysis with grave future portents.
In fact, it was political theatre, a variation of a similar drama that played out in 1995. Remember, the conflict between Mukesh and Anil Ambani over their industrial inheritance was terribly bitter, but nobody thought for a minute that it would lead to Reliance defaulting on its debts.
The same holds for the US: partisan battles can be bitter and can lead to gridlock, even technical default, but not to real inability to pay up. Even if the US had technically defaulted by being unable to issue cheques for a few days - as actually happened in 1995 - nobody doubted that the cheques would become cashable with a small delay.
Indeed, in the past few days global investors have exited emerging markets and rushed into dollars as a safe haven. That underlines the point that, no matter how big the problems of the US may be, no other country looks a safer haven. Investors may desire an alternative to the American dollar as the main global currency, but neither the euro nor yen look remotely capable of taking its place.
The US remains unrivalled in its innovation and academic strength. The problems of Europe are deeper. The Eurozone was created as a monetary union of European countries without a corresponding fiscal union. This has turned out to be unsustainable. One alternative is for the weaker countries of southern Europe to abandon the euro and regain flexibility over their own currencies.
The second alternative is for Eurozone countries to go for some sort of fiscal union, in which the stronger countries guarantee the debts of the weaker economies. Politicians find both alternatives too radical to contemplate, and so preferred one fudge after another.
Markets Apprehensive
The markets can see this, and so are apprehensive. Yet fudging is indeed possible for quite some time. Voters in Germany and some other northern countries are dead against repeated rescues of what they regard as the profligate and ungrateful south. So a formal fiscal union of all Eurozone countries is impossible.
But it is entirely possible for the weaker countries to be given the right to issue Eurobonds - bonds guaranteed by all countries of the European Union. Since Germany and France are among the guarantors, the bonds will be seen as safe, and interest rates will come down to sustainable levels. This fudge can continue for years before the contingent liability of the northern countries begins to look excessive.
No double-dip recession but Europe a worry: Greenspan
WASHINGTON | Sun Aug 7, 2011 1:50pm EDT
(Reuters) - Former Federal Reserve Chairman Alan Greenspan on Sunday downplayed the risk of a double-dip recession in the United States, saying its domestic economy was in better shape compared to its European peers.
A double-dip recession "depends on Europe, not the United States," Greenspan told NBC television's "Meet the Press." "The United States was actually doing relatively well -- sluggish, but going forward -- until Italy ran into trouble."
The U.S. economy stumbled badly in the first half of 2011 and came dangerously close to contracting in the January-March period, raising fears that the economy was sliding back into recession.
Those fears were calmed somewhat last week when a debt deal was agreed before the August 2 deadline as well as data showing that employers added 117,000 jobs in July. But Standard & Poor's downgrade of the country's top-notch "AAA" credit rating late on Friday to "AA+" could hurt the recovery.
"With all of this bickering going on, the economy is slowing down," Greenspan said. "You can see it in all the data. I don't see a double-dip, but I do see it slowing down."
Europe, which buys a quarter of U.S. exports and houses the operations of many American companies, would determine the course of the U.S. economy's recovery, Greenspan said.
European leaders are struggling to contain a sovereign debt crisis, which has spread to Italy, the euro zone's third-largest economy, and is causing turmoil in global financial markets.
Greenspan said Italy's troubles could contribute to destabilizing the European and U.S. economies.
"When Italy showed signs of significant weakness in selling its bonds ... it created a massive problem within Europe because Italy is a very large country that ... indeed cannot be bailed out," he said. "And that's what's causing our problem."
Greenspan said despite the S&P downgrade, U.S. Treasury bonds, unlike Italian bonds, were still a safe investment.
"This is not an issue of credit rating. The United States can pay any debt it has because it can always print money to do that. There's zero probability of default," he said. "What I think the S&P (downgrade) did was to hit a nerve. ... It's hit the self-esteem of the United States, the psyche. And it's having a much profounder effect than I conceived could happen."
Markets in the Gulf region and in Israel, among the first to trade since the U.S. credit downgrading, tumbled on Sunday amid worries the U.S. downgrade and European debt woes may trigger another global downturn.
Greenspan said the same was likely to happen worldwide when global markets open on Monday
Barclays: Some Short-Term And Long-Term Implications Of The Downgrade
Joe Weisenthal
Realistically, nobody knows exactly what impact the S&P downgrade of US sovereign credit from AAA to AA+ means.
But it'd be boring and foolish not to guess.
Here's a snip from a note from Barclays' Ajay Rajadhyaksha.
First, the near-term implications:
Investor sentiment is clearly fragile after the drop in all risky assets over the last several days. But the near-term impacts of this one-notch downgrade should be minimal for the US bond markets, in part because sentiment is so fragile.
· We do not anticipate forced selling of US Treasuries from any significant investor base. Foreign central banks maintain a large share of their FX reserves in USTs because it is the deepest and most liquid bond market. This is unlikely to change due to a ratings downgrade. Mutual fund investment guidelines retain significant flexibility regarding the handling of this action. The US banking system should not be forced to sell as well because the Fed has issued a guideline noting no change in risk weights. Similarly, insurance companies are also unlikely to be forced to sell as the NAIC has already de-emphasized ratings for regulatory capital requirements.
· Haircuts in the repo market may rise but since haircuts or margins are meant to protect cash lenders from daily price fluctuations in the collateral, they are more likely to depend on changes in price volatility of Treasuries, rather than just a downgrade in itself.
· Similarly, in the derivatives market, most CSAs do not explicitly draw a link between the eligibility of US Treasuries as collateral and their AAA rating. In addition, given that major US banks are several notches below AAA, a single-notch downgrade should not lead to downgrades in the credit ratings of banks. Even if that were to occur, additional collateral requirements would be manageable in our view.
And then some long-term implications:
Being the world's reserve currency seems incongruous with a AA rating. The longer-term effects are driven primarily by whether markets eventually also downgrade the US. In that case, the biggest impact should be through the effect on the USD as a reserve currency.
· Based on prior research, we believe that a one-notch downgrade would lead to an increase of 25bp in borrowing costs. But this is not a function of a specific rating action, but of the market downgrading the sovereign rating.
· A downgrade could increase diversification away from the USD. Foreign investors have supplied 30-40% of non-financial credit creation in the US over the past few years. An increase in the pace of diversification should be an economic drag, as domestic savings would have to rise to pick up the slack
Templeton's Mobius sees high degree of uncertainty, volatility
Written by Reuters
SINGAPORE: Mark Mobius, executive chairman of Templeton Emerging Markets group, said on Sunday he sees a high degree of uncertainty and volatility in financial markets in the wake of Standard & Poor's decision to downgrade the U.S. credit rating.
Mobius warned that the U.S. dollar's role as an anchor to the global investor community was deteriorating and said emerging market currencies and stocks could become safe havens.
"The initial reaction will be a high degree of uncertainty and thus volatility since investors will not know where to turn for safety," said Mobius, whose unit oversees $50 billion in emerging market assets.
"During the sub-prime crisis safety was in U.S. Dollars and U.S. Treasuries. Now that anchor to the global community is deteriorating," he said in an email to Reuters. – Reuters
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