Sure enough, more bad news late last week when one of the politicized credit rating agencies, Standard & Poors, decided that the United States was a AA+ risk, instead of triple A.
A few commentators say to ignore S&P, because they were wrong about the mortgage-backed securities. I think the market is pretty much ignoring the AA+, because 10-year U.S. treasury notes are barely moving in early Tokyo trading. If the U.S. suddenly became this big credit risk, you’d see investors wanting a lot more than 2.6% a year to lend for 10 years. A bad credit has to pay a higher rate.
What the downgrade seems to be doing is furthering the story that the American government won’t be able to provide future stimulus to the American economy, which usually is lapped up by the world economy. So a place like Japan tanks, because it means there’ll be less opportunities for sales to America. The yen strengthens because the Japanese multinationals pull back and hold yen. Even though Japan has its own debt problems, they are almost exclusively between Japanese parties—very little owed to anyone overseas. People wonder why Japan isn’t being drawn into to the debt-to-GDP black hole. That’s because Japan is its own story.
I hate to think what Monday morning is going to look like in New York, but it’s probably going to start out a down day. Double-A-plus rated treasuries are probably going to soak up more cash, and the riskier asset classes (junk bonds, big banks, etc.) are going to take another hit.
Will the bottom be where it was in March 2009? Probably higher, but no one can guess how much more down there is before the bottom.
[Update 8/8/11: I told you so.
Dow Jones: down around 600 points at the lowest, so far. Recovered since then.
10 year Treasury: at around a 2.35% effective yield, down 20 basis points.]