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The market's verdict on the Standard & Poor's (S&P) U.S. credit downgrade is in – and it isn't good.
In direct response to the U.S. credit downgrade, the Dow Jones Industrial Average plunged more than 631 points, or 5.52%, yesterday (Monday), after falling 6% last week.
No question, we're in the midst of a free-fall. And there's no doubt about the role Washington played in creating this dangerous situation. But U.S. policymakers aren't the only ones to blame.
Some of Wall Street's heaviest hitters, including Warren Buffett and Bill Miller, have zeroed in on S&P for perhaps being a little too overzealous in its approach.
"I don't get it. It doesn't make sense. In Omaha, the U.S. is still triple-A rated," Buffett told Fox Business Network. "And if there were a quadruple-A, I'd give it to the U.S."
Buffett and fellow S&P critics said the agency made a hasty move that scared investors and clobbered markets.
Buffett: "I Don't Get It"
Buffett said the U.S. debt downgrade would not deter him from investing in U.S. Treasuries.
"If anything, it may change my opinion on S&P," Buffett said.
Echoing Buffett's disbelief was Legg Mason Inc.'s (NYSE: LM) Chief Investment Officer Bill Miller.
Miller said S&P "rushed to judgment" and took a "precipitous, wrong and dangerous" action.
"At best, S&P showed a stunning ignorance and complete disregard for the potential consequences of its actions on a fragile global financial system," he said.
The U.S. is the "most productive economy in the world," Miller told The Financial Times. "There simply is no alternative to the dollar as the global reserve currency and as the instrument of global trade."
Miller also criticized S&P for making a history-making decision so quickly after Washington finished a heated debt ceiling battle, and said the ill-timed announcement could multiply downgrade damage on markets.
"S&P chose to take this action after the worst week in U.S. equity markets since 2008, a week which not only saw stocks fall sharply, but which also witnessed a dangerous escalation in the ongoing European debt crisis," Miller said.
Gross: S&P Showed Some "Spine"
There was at least one vocal supporter of the S&P downgrade: PIMCO's Bill Gross, manager of the world's biggest bond mutual fund.
"I think S&P has demonstrated some spine; they finally got it right," Gross told Bloomberg Television.
Gross said the United States' mounting debt pile poses "enormous problems" for the nation. He's been saying for months that U.S. Treasuries are unattractive because yields aren't high enough to compensate for increasing inflation risk.
He has suggested investors consider assets of countries with "cleaner dirty shirts" and higher real interest rates, such as Canada, Mexico, Brazil and Germany.
Gross said the United States needs a new game plan to revive its economy and should target investment, not consumption.
"We need to become more productive as a global exporter," said Gross.
Investing icon Jim Rogers shrugged at the announcement, noting chances were high that a U.S. credit rating downgrade was coming.
"Everybody has known that America is the largest debtor nation in the history of the world for a long time, this is not news. It's not even old news, it's just not news," Rogers told Bloomberg Television. "This is not what's making the markets go down. Markets are going down because America has problems, Europe has problems, China's trying to slow things down…there are plenty of reasons for the market to go down."
What Comes After a Downgrade of U.S. Debt
The bold S&P move has brought more attention to how severe the U.S. fiscal situation has become.
"The debt problem is not one our grandchildren must live with; it is our problem," said banking analyst Richard Bove of Rochdale Securities. "The so-called ‘can' has reached the end of the road. The issue can no longer be ignored."
Americans once again asked the question, is this the start of a double-dip recession?
Buffett still thinks the economy will avoid another tumble.
"Financial markets create their own dynamics, but I don't think we're facing a double dip recession," Buffett told Bloomberg. "Clearly what stock markets do have is an effect on confidence, and this sell-off can create a lack of confidence."
One thing made clear Monday is the stock selling isn't over.
Former Federal Reserve Chairman Alan Greenspan appeared on NBC's "Meet the Press" Sunday and said investors should expect the selling to take a while before bottoming out.
"It depends on Europe, not the United States," Greenspan said. "The United States was actually doing relatively well, sluggish but going forward until Italy ran into trouble."
Greenspan said that Europe "has been a very important driving force in the overall earnings of U.S. corporations," and its continued profitability relies on willing European consumers.
Legg Mason's Miller hopes the S&P downgrade of U.S. debt prompts Washington to change in the credit-ratings business.
"One consequence we can all hope for is that Congress ends the oligopoly of Nationally Recognized Statistical Ratings Agencies (NRSRO) before they contribute to or ignite another financial crisis," Miller said.
As far as U.S. economic policy post-downgrade, Rogers said not to expect much change despite S&P's warning about growing U.S. debt.
"What's going to happen is, [the Fed's] going to print more money," said Rogers. "In the United States, the head of the central bank doesn't know anything about economics or finance or currencies, all he knows is printing money."
Rogers said more economic stimulus and federal spending will only exacerbate the problem; it's time for the United States to accept its fiscal fate.
"The only thing that works is facing reality," said Rogers. "Let people who are bankrupt go bankrupt."
News and Related Story Links:
- Money Morning:
The Real Reason for Yesterday's Stock-Market Sell-Off
- Money Morning:
Time to Profit, Not Panic, from the Stock-Market Sell-Off
- Los Angeles Times:
What experts are saying about S&P downgrade of U.S. credit rating
- The Financial Times:
Bill Miller: US downgrade ‘wrong and dangerous'
- Meet the Press:
Downgrade ‘Hit a Nerve'
- Bloomberg Television:
Jim Rogers on U.S. Rating Downgrade, Global Markets
- Associated Press:
Markets get first test after credit downgrade