Black Monday crash certain as S&P downgrades US treasuries

Dettes et Décote américaine

For the first time in history US treasury bonds are no longer triple-A rated. The bonds of Germany, France, Canada and the UK now have a higher rating.
This is arguably the biggest upset in global finance ever as the US treasury bond is the largest and most liquid market in global finance. Its triple-A status is a linchpin of the global financial system and has just been pulled out.
The announcement came after US financial market closed on Friday following a more than 10 per cent weekly loss in the S&P 500, the worst week since the global financial crisis of 2008.
Insiders knew
Clearly the insiders of Wall Street knew exactly what was coming after the close on Friday, so they sold the market down. However, with everybody else kept in the dark the real selling will start on Monday.
How bad will the panic be? Well, it is hard to get over the significance of the US losing its top credit rating. US treasuries are the most widely held financial instrument in the world and the S&P downgrade will force those institutions wedded to triple-A to seek an immediate divorce.
US banks that have stuffed themselves full of US treasuries in return for easy money from the QE program will surely have to write-off huge sums against the reduced value of their treasury bond holdings.
The US bond market will fall and interest rates rise to the point at which bond investors are sufficiently rewarded for the increased risk of holding US debt. Where will the money go?
There will be a flight to other AAA-rated bonds but realistically how secure is a UK government bond by comparison, for example? The UK has the worst global debt profile after Spain. And surely if the US can lose triple-A it is an open season for downgrades.
The other obvious beneficiary is precious metals. If both bond and equity markets are in trouble, and real estate crashed ages ago, then that does not leave many alternatives.
Precious metals
Gold and silver reserves are by nature limited and as the demand for them takes off there is considerable scope for above-inflation price rises. Indeed, a breakdown in the bond markets of the world is the best possible scenario for precious metal prices.
It was getting increasingly obvious last week that there had to be something really big coming up to justify the sell-off of stocks in the normally quiet holiday month of August. Now we know what it was but this will come as a big shock to many investors and the reaction is going to be very nasty.
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