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Tuesday, August 9, 2011

Does S&P Lack Credibility?

With the news of the recent loss of the U.S.' coveted AAA credit rating, stock markets went into a tailspin. All three major U.S. stock markets fell between 5% and 7% since the announcement by S&P.

The downgrade was a result of political disputes on how to handle the mounting debt. S&P delivered a sharp rebuke to the political class of the U.S.

Investors obviously panicked and decided to sell and ask questions later. However, some analysts are questioning the credibility of S&P in particular and rating agencies in general. S&P, along with Moody's Investors Service and Fitch Ratings were the same agencies that gave AAA ratings to subprime mortgage instruments that were, for the most part, junk.

Add in that S&P made a slight mathematical error when they first submitted their report to the Treasury Department: S&P, due to a computational error, overstated the debt problem by $2 trillion!

Nevertheless, even though this was pointed out, S&P still downgraded the U.S. rating.

The U.S. is definitely in trouble, but S&P lacks the credibility necessary to be the ones to point this out.

Friday, August 5, 2011

A Double Dip Recession?

Are we heading for another recession? Based upon the most recent headlines, some experts say yes. Still, it's far from a certainty and may simply be a minor correction before the economy begins a slow recovery.

It is possible that the worst is over in terms of housing prices, job losses and the hit to savings and retirement funds. On the other hand, few economists predicted the housing crisis or the worldwide fallout or the subprime mortgage crisis, so one can be forgiven for being skeptical about claims about 'market corrections'.

Given the US debt crisis, the EU debt crisis, the weakening US dollar and the fall in the stock markets, many are speculating another Great Depression. Along with calls to move back to the Gold Standard, is it any wonder than many fear another global meltdown?

Whether this will happen is anyone's guess but with the US debt at over $12 trillion and with record consumer debt, it may appear inevitable that the modest gains in the economy will be rolled back.

Nevertheless, it is likely that we will narrowly avoid dipping into another recession, but it is clear that we are not out of the woods yet.