Friday evening, it was announced Standard & Poor's had downgraded the pristine AAA credit rating of the United States to AA+. It was the first downgrade of US credit worthiness in history. The administration was quick to criticize Standard and Poor's, stating they miscalculated their figures by at least two trillion dollars, that's $2,000,000,000,000.00, which they had, but, if the water is above flood stage, it doesn't matter by how many feet. Some in Washington even seek an investigation of S&P. Do politicians, bureaucrats and the administration really want the private sector dissecting government math that long ago lost transparency and credibility? The fact is S&P gave the administration and politicians an ultimatum: come up with $400 billion in annual spending cuts for ten years, an amount their own commission said was possible, or risk downgrade. The number agreed to in Washington, which for most cuts, doesn't take effect until 2017, was an annual cut of $270 billion, or a shortfall of $1.3 trillion over ten years. Unfortunately, that's one year's deficit spending now. Only in Washington can such fiscal irresponsibility exist that would have long ago bankrupted individuals and corporations.

Many are now speculating what the downgrade means. Will Treasury bonds fall?, will the stock market crash?, will borrowing costs rise?, will this lead us to another recession? History does show that when a borrower's credit rating is lowered, bond prices fall, which increases the yield, given the added risk. Concern is warranted given the substantial number of interest rates tied to yields of US notes and bonds. Too, there are certain entities allowed to purchase only AAA credits. An adjustment to US treasury prices would be rational, but will it take place?

First, the other rating agencies have not lowered the US credit rating. Moody's does not look like they will further review their rating for some time. Fitch says they are conducting a review and will have a decision at month end. If two of the three ratings agencies remain at AAA, most will ignore S&P's stance. The other interested party is the market. For bond prices to materially fall, the other AAA credits must have the liquidity to absorb additional demand, and be judged more credit worthy than the US. Before Friday, there was approximately $47 trillion in AAA sovereign debt among sixteen nations. Now there is $32.4 trillion among fifteen nations. At $14.5 trillion in external debt, the US was 31% of the total. This exceeds the combined total of second ranked United Kingdom ($9 trillion) and third place Germany ($4.7 trillion). Some too are rightfully concerned by $30 trillion, or 93%, of the balance, being tied to Western European countries, which are experiencing their own financial distress from potential defaults in Greece, Italy, Spain, Portugal and Ireland.

Our crystal ball is not as transparent as we'd like, but we don't see this downgrade having a material effect on the markets. While it should, it's more a political issue, given the fact the United States continues to be the world's sole superpower, both militarily, and economically. This will no doubt extend recent market volatility, but we believe we continue to be in a period where stocks should be accumulated and that patience will be rewarded.