The image of the rating agencies in the press has not been good for sometime. The ratings provided by the agencies were frequently branded as a gimmick. However, this week, it was a different story. S & P downgraded the bonds which were backed by sub-prime home loans. (Link to explain sub-prime) Sub-prime is not at all a new story, but still the note from the rating agency did cause a tremor in the markets. Later in the week, Rio Tinto’s friendly takeover of Alcan lifted the mood and stocks started coming back to normal.
Many people agree that we live in a growing world economy. Is it possible for another news story related to sub-prime to cause further troubles? My guess is, there will be nothing substantial.
John Maynard Keynes said “When the facts change, I change my mind. What do you do sir?” This week we saw reports of acceleration in US manufacturing and reports from the US Department of Labour that the employment number rose considerably in the last three months. But at the same time, the effects of the sub-prime issue is still causing headlines and possibly giving control for growth.
Chinese cheap currency makes its exports a very attractive option, thereby accelerating its growth as the next financial super power. But this is contributing to a high trade deficit for the US with China. Hillary Clinton and Barack Obama are supporting the US legislation that can levy duties on Chinese goods if China does not come in line with “sustainable monetary policy and revalue its currency”. These are indeed American solutions to its problems. Not many other countries can afford to take that route.
We also saw sterling hit a 26 year high even though the US economy is showing good signs of growth. But it all points to a world where goods and services from America become more affordable. Most of the Central Banks in the developed world are showing signs of increasing monetary controls and the Fed is keeping its interest rate without change. It all points to a recovery very soon giving enough time for the US economy to recover. Or is it all designed to go that way?