Monday, 8 August 2011
IT'S MORNING IN AMERICA
Everyone has heard what’s going on in the markets and talking about “Triple A Credit Rating’s” and “Downgraded”. Perhaps it would be a good idea to help you understand what that specifically means and how it affects you.
A credit ratings company helps investors decide how risky it is to invest money in a certain country.
As investment opportunities become more global and diverse, it is difficult to decide not only which companies but also which countries are good investment opportunities. There are advantages to investing in foreign markets, but the risks associated with sending money abroad are considerably higher than those associated with investing in your own domestic market.
It is important to gain insight into different investment environments but also to understand the risks and advantages these environments pose. Measuring the ability and willingness of an entity - which could be a person, a corporation, or a country - to keep its financial commitments or its debt, credit ratings are essential tools for helping you make some investment decisions.
There are three top agencies that deal in credit ratings for the investment world. These are: Moody's, Standard and Poor's (S&P's) and Fitch IBCA (known as "the big three").
Each of these agencies aims to provide a rating system to help investors determine the risk associated with investing in a specific company, investing instrument or market.
The ratings lie on a spectrum ranging between highest credit quality on one end and default or "junk" on the other. Long–term credit ratings are denoted with a letter: a triple A (AAA) is the highest credit quality, and C or D (depending on the agency issuing the rating) is the lowest or junk quality. Within this spectrum there are different degrees of each rating, which are, depending on the agency, sometimes denoted by a plus or negative sign or a number.
What has happened now and why does it affect you?
If you watch the news, you hear all the time about the Dow Jones Industrial Average and other averages like the S&P 500 or The Russel 2000. These are "market averages" designed to tell you how companies traded on the stock market are doing in general.
The Dow Jones Industrial Average is simply the average value of 30 large, industrial stocks. Big companies like General Motors, Goodyear, IBM and Exxon are the kinds of companies that make up this index.
The thing to understand is that the Dow Jones Industrial Average is nothing magic -- someone has chosen 30 companies and averaged their values together by following a specific formula. That's all it is.
There are all sorts of averages out there. The S&P 500 is the average value of 500 different large companies. The Russel 2000 tracks the average of 2,000 smaller companies. And there are others.
What these averages tell you is the general health of stock prices as a whole. If the economy is "doing well," then the prices of stocks as a group tend to rise. If it is "doing poorly," prices as a group tend to fall. The averages show you these tendencies in the market as a whole. If a specific stock is going down while the market as a whole is going up, that tells you something. Or if a stock is rising, but is rising faster or slower than the market as a whole, that tells you something as well.
Stocks in America have slumped for two straight weeks as manufacturing and consumer spending data showed the world’s largest economy is slowing. The S&P 500 rose as much as 1.5 percent in the first five minutes of trading on Aug. 5 as the Labor Department said American employers added more jobs than forecast in July and the unemployment rate fell for the first time in four months. The index turned lower on growing speculation that S&P was preparing to strip the U.S. of its AAA rating for the first time.
Then the S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn't do enough to address the gloomy outlook for America's finances. It downgraded long-term U.S. debt to AA+, a score that ranks below more than a dozen governments', including Liechtenstein's, and on par with Belgium's and New Zealand's.
S&P said the downgrade "reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics." It also blamed the weakened "effectiveness, stability, and predictability" of U.S. policy making and political institutions at a time when challenges are mounting.
I think the last sentence from S&P statement says it all: "It also blamed the weakened "effectiveness, stability, and predictability" of U.S. policy making and political institutions at a time when challenges are mounting.
People crave consistency and stability. People need to know where you stand. It doesn’t matter what it is, if I will make my decision based on what I know and sincerely believe. The Obama Administration have revealed bold rhetoric but vague actions with regard to controlling the deficit. He says one thing to the union pals and another at a town hall meeting. people are confused, the markets are arguably all over the place because of that. The only thing that he has done is continue to spend money that they don't have and get a nationwide Health Care system in place that no-one likes, is expensive and lowers the quality of care to patients. Now, with the S&P downgrade and Moody’s to follow, the cost of borrowing will become more, which will naturally trickle down to the oridanry folks. this means that gas prices will be higher, insurance will be higher and getting a loan will be that much more expensive.
A lot of people are asking us what can be done to sort this problem out.
My solution is, get the American juggernaut rolling again by incentives. How do you do that, deregulate areas that could hinder entrepreneurs, slash your fiscal spending, repeal ObamaCare which will add to the deficit, freeze all entitlements (including job seekers allowance) to anyone other than the disabled and the veterans. Ensure that every taxpayer pays a flat rate tax which won’t increase for 5 years and won’t exceed 28% of what they earn. Cut the corporate tax rate, cut the income tax at make sure that it is stable for the next 5 years. The Congress should put together a budget that will guarantee that the budget is balanced within 8 years and continues to do so each year after that.
You may ask, if you are cutting every tax how are you going to earn enough to service the debt that you currently have, when you are not even raising taxes?
The answer is simple, lowering taxes means having more people in the system that are eligible to pay taxes. You will see a huge influx of new revenue once this is enacted. If you raise taxes, a small company won’t be able to hire another person, who in turn will start paying money into the system, etc etc.
People are saying that the credit downgrade is the end of the American Dream...I don't believe so, not for one minute.
If we keep electing the likes of Obama then we are in for more trouble but the American people are dynamic, capitalistic and hungry and they will not sit back and see their country collapse and further liberties take from them. look at the Tea Party and see what happens when individuals come together and take on the establishment.
I have no doubt that the job of sorting out the debt in America will be solved. It won’t happen under Obama with his labor union buddies, it will happen under a different President that cares about its future, who will proclaim that the "American Dream" is very much alive and kicking.