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S&P Downgrades US Treasury Outlook with a Tin Ear for Politics


Thousands of articles have been written about the S&P downgrade for the outlook of US Sovereign debtA few points have been under reported.   

This is the first time in history a major rating agency  downgraded the outlook for US Treasury debtThe announcement was made Monday, April 18th.  However, as was first reported by Zero Hedge, the White House was aware of S&P's decision before the fact.  This allowed the communications staff, The CEA, and a number of insiders at the White House and Treasury to get in front of the negative news cycleI find it hard to believe it was a confidence that Treasury Secretary Geithner made appearances on multiple Sunday news shows trumpeting the Administration's efforts to deal with the budget issue while simultaneously jabbing Republican leadership.  Clearly Geithner knew about the report

Congress was in Easter recess April 18thMembers and Senators were scatteredStatements were issued, but not with the same concentrated power that comes with speeches in the Senate or House, or press conferencesGiven the fact that the White House was aware of the downgrade and Congress was out of town, this allowed the Administration to control the news flowCongressional leaders do not appreciate being manipulated in this manner.  Standard and Poors showed naiveté that may come back to haunt them as Republicans now have subpoena power and may suddenly renew their curiosity for how ratings agencies function

The release came on what many call Tax-DayThe deadline for filing tax returns and a day when many Americans protest the complexities of the federal tax codeTax-Day is often a day when proponents of tax simplification and other arcane policy issues voice their concernsFor those who may have forgotten, Tax-Day 2011 was the First birthday of the Tea Party, which would have garnered some press coverageHowever, the S&P report drew all of the media attention away from almost every other story.  Why would S&P want to anger grass-roots political activists in this manner

Economic policy has two masters, fiscal and monetaryThe downgrade focused its ire squarely on the political processIn so doing S&P gave the Federal Reserve a "free pass."  I don't know of any investment professional or political leader who does not feel the Federal Reserve is at least an equal partner in how the United States is working through the credit crisisAt the very least, fiscal policy and monetary policy work "hand-in-glove."  However, the report directly supports controversial Fed monetary policy with a single paragraph

Here is the cut and paste taken directly from the report...

Furthermore, the U.S. dollar is the world's most used currency, which
provides the U.S. with unique external flexibility; the vast majority of U.S.
trade flows and external liabilities are denominated in its own dollars.
Recent depreciation of the currency has not materially affected this position,
and we do not expect this to change in the medium term (see "Après Le Déluge,
The U.S. Dollar Remains The Key International Currency," March 10, 2010,
RatingsDirect).


I find this paragraph to be stunning

The Federal Reserve is completely absolved of complicity in what is seen by many as an extraordinarily risky strategyS&P then references a study over a year old as though this report was the definitive study on the topicI cannot think of an investment professional who believes that reports generated over a year ago reflect today's complex valuation model for currencies, oil, gold and other commodities

Finally, nothing is new in this reportNo new information is providedNo new analysis offeredIn its response to the report the White House said as muchTherefore, what took S&P so long?  Would it not have been better to offer this report when President Obama announced a $3.0T budget?  How was that not a material eventWas it not appropriate for S&P to alert investors to the fact that the Obama Administration has increased federal spending by over 30% in two years, yet almost allowed the federal system to shut down when it would not agree to cuts that amounted to a rounding error

Would it not have been prudent to inform investors that the federal system ran without a formal budget for the previous year?  Or that the Democrat controlled Congress failed to pass any appropriations billsThe fact that S&P said nothing when Democrats controlled the White House and both houses of Congress makes this report oddly timed at best

This report should have been issued a year agoBy making this report public now, S&P has done the investment world a dis-serviceThe report is a political document, not a credit analysis and like many political documents carries with it a host of unintended consequences

There was only a blip in financial marketsStocks had a tough day, but were controlled in decline, same with Treasury securities, gold and commoditiesFor the investment world this was a non-eventFor the political world it was another example of an investment concern that does not understand the political process