Thursday, May 21, 2009

Tea Leave Follow Up

Today we woke to a very interesting bit of news. Now it was the headline that initial jobless claims declined (yawn). It was that S&P was about to lower the rating on UK sovereign debt. Could the US be next? In keeping with this theme and my commentary yesterday the only green on my screen is, short dollar, gold, commodities and short treasury bonds. The macro environment is changing investors must as well.

With the UK Credit outlook lowered to negative from stable looking at the commensurate data for the U.S. is in order.

The premise for the change: debt/GDP will soon pass 100%. In that case the US should be afraid with some estimates for the comparable ratio in the United States at over 370%.

S&P's statment:

The negative outlook reflects Standard & Poor's view that, in light of the challenges to strengthen the tax base and contain public expenditures, the U.K. government debt burden could approach 100% of GDP by 2013 and remain near that level thereafter. The rating could be lowered if we conclude that, following the election, the next government's fiscal consolidation plans are unlikely to put the U.K. debt burden on a secure downward trajectory over the medium term. Conversely, the outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a sustainable footing, or if fiscal outturns are more benign than we currently anticipate.

First Japan, now the U.K., the pattern is pretty obvious.

John Barnyak