At the opening of Futures Trading (6PM ET) markets signaled us with a nasty response to the new lower AA+ rating. S&P futures fell 2.2%. Nasdaq Futures fell 2% while the Dow Futures fell 2.2%. What does this all mean to you and your money? History tells us it may not translate into disaster. Canada lost it’s AAA rating in April of 1993 and over the next year their stock market rose 15%. In November 1998 Japan was downgraded and Tokyo’s stock market climbed 25% in the following 12 months.
History is however only a barometer. The market in 1993 and 1998 were not as globally dependent then as they are now. For example China owns more than $1Trillion in US Treasuries. They are asking for us to clean up our fiscal affairs. What happens if they have a change of heart and decide to sell their stake in our treasuries? Most assuredly our rates will rise and put an additional strangle hold on any possible recovery.
China’s response to the “downgrade” was interesting. This is hot off the press this evening: “Stop letting the domestic electoral politics take the global economy hostage.”
We think we are the “superpower” and China knows that we have allowed our politics run our economy. Shame on us.