Sunday, 7 August, 2011

S & P Cuts US Credit Rating

S & P Cuts US Credit Rating

On July 19, 2011, I'd posted in these columns a short note:

In that post, I'd clearly mentioned, "Wonder when (not whether) the other major credit rating agencies are going to actually downgrade the AAA rating for USA???"

Apparently, I didn't have to wait for long. On Friday night (on August 5, 2011), after market hours in US, S & P dropped the bombshell. The USA is no more a triple-A economy.

As I'd mentioned in my earlier post, all bets are now off.

Optimistic Scenario:

  • If strong reformist measures are quickly announced by both US & Europe AND
  • If actual implementation of such measures quickly - very quickly AND
  • If strong financial empires led by folks who put big-time money behind their prediction that the world economy would go into a double-dip recession leading to an outright depression, Then & only Then
  • Things may stabilise and there can be a semblence of calm in the markets. In which case, we may end up with a sideways market with a gradual shift in financial power to the markets which are still somewhat stable and showing growth. Which could possibly be a positive for India. Obviously, all this would take time. In months, certainly not weeks.

Pessimistic Scenario:

  • If any of the elements of the Optimistic Scenario mentioned above does not play out, the result would naturally be utter chaos.

In addition, we can have chaos if one or more of the following events occur:

  • Crude Oil and / or Food Grain prices go crazy
  • Any of the "minor conflicts" erupts into a full-fledged war (which can be a diversionary tactic adopted by some crazy politicians somewhere in this globe) - Potential areas where such conflicts can erupt: Southern Europe (from among the PIIGS countries), West Asia (due to Oil), Indo-Pak border (due to Kashmir), the China Factor (conflicts due to border skirmishes with India or the problems in the South China Sea or border issues with Japan), the Korean problems, etc.
  • Many of the funds around the world which are "Compelled by their mandates" to invest exclusively in AAA rated securities may dump the US bonds and treasuries.

Virtually any of the above can result in all the above negative scenarios falling in place and occuring forthwith.

All I can say is:

  • The situation is fluid and complex at the same time
  • Any action by any of the players can have completely unintended consequences
  • More "negative unintended consequences" are likely than positive ones
  • There will certainly be violent swings in markets all over the world.

Take care and keep lots of your cash ready for some amazing buying opportunities in the months ahead.

Regards,

N


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