Equity Predictions an investment Jargons

• ​We believe investment managers can analyze numerous data sources and apply lessons learned from past economic cycles to make reasonable assessments about the global economic outlook.
• We also believe managers can make reasonable judgments about asset classes over the long term and, through rigorous bottom-up research, develop an edge regarding the outlook for individual companies.
• However, the market as a whole is much better at aggregating all the information that could affect any of the thousands of companies in the stock market than any investor could possibly be. Hence predictions of where the stock market will close on a given date are likely to be wrong.

People love bold predictions. More precisely: People love people who make bold predictions that are eventually proven correct. We tend to put such soothsayers on pedestals and anoint them heroes. And why shouldn’t we? They were able to see important outcomes that the rest of us missed.

 

Consider two notable examples:

• In 1969 quarterback Joe Namath boldly guaranteed his underdog New York Jets would beat the Baltimore Colts to win the Super Bowl. An audacious prediction, when Namath successfully led his team to beat the Colts he ensured his place in sports history.
    
• In 1961 President Kennedy called for the nation to land a man on the moon and return him safely to Earth by the end of the decade. At the time an American hadn’t even orbited the Earth, let alone made it to the moon. Considering today it takes almost a decade just to design a new rocket, Kennedy’s call to action from virtually a blank sheet of paper was truly a “moon shot.”

But our memories tend to be skewed: we remember the heroes but often forget the bold predictions that fell flat. For example:

• What was the name of the pastor who predicted the world would end on May 21, 2011? I can’t remember either. I’m sure I would remember had the world actually ended. (Well, maybe not, but you get my point.)
  
• In December 2007 sell-side equity strategist Abby Joseph Cohen predicted the S&P 500 would climb from 1,463 to reach 1,675 by the end of 2008. Given the brewing financial crisis, this was a bold call. In fact, the crisis dramatically worsened and the S&P 500 ended 2008 at 903. As the U.S. crisis recedes into memory, people have moved on.

Turning on business television, one can hear bold predictions almost daily: Where will interest rates be in the future or what actions will policymakers take to solve the European debt crisis? Every January many strategists predict the level of the stock market at year-end. It’s an annual tradition.

 

But with so many bold predictions routinely made on every side of virtually every economic issue, it can be hard to determine which predictions to take seriously. How does one make sense of the noise?

 

I believe two questions are essential to assessing predictions:

 

First, is the prediction “knowable?” Joe Namath was certainly able to influence the outcome of the Super Bowl. His prediction should have carried more weight than that of the average football commentator. We should pay more attention to those with special insights into knowable topics.

 

Second, does the person making the prediction have any downside if wrong? While President Kennedy is rightly lauded for setting the country on a path that transformed America’s standing in the world, presidents frequently make such bold calls, and the majority of them expire unfulfilled and unnoticed. For example, in 1983 President Reagan called for development of a missile shield to defend America against a nuclear attack from the Soviet Union; “Star Wars” never came to pass. In 2003 President Bush called for hydrogen cars to be commercially viable by 2020; seven years later President Obama cancelled their funding. There is little downside to Presidents setting ambitious goals – and they might improve their place in history if one of them works out.

 

In a society where we hoist the heroes but forget the mistakes, incentives are strongly skewed toward making as many bold predictions as possible, because at least a few are bound to hit. We should pay more attention to those who actually have something to lose if they are wrong.

 

So let’s analyze both questions in the context of predicting markets:

 

We at PIMCO believe certain investment topics are knowable and some are not knowable. To borrow a phrase from former Defense Secretary Donald Rumsfeld, there are Known Knowns and Known Unknowns. I will leave Unknown Unknowns for a future piece.

 

Known Knowns: 

• Global economic outlook. We believe investment managers can analyze numerous data sources on global economic activity and apply lessons learned from past economic cycles to make reasonable assessments for what the future is likely to hold. This is complicated by changing global dynamics and sometimes unpredictable politics. But a robust economic framework can yield real benefits for investors.
  
• Relative value among asset classes. Looking at the current prices of securities, such as P/E multiples, dividend yields and expected earnings growth for stocks, and spreads and yields for bonds, in the context of the current economic environment, managers can make reasonable judgments about the overall expected return from asset classes over the long term. From this perspective, managers can determine which asset classes they believe will provide the best risk-adjusted returns over time. Stress testing these assumptions against a range of economic environments is important.
   
• Outlook for an individual security, be it a stock or bond. Through rigorous bottom-up research, analyzing financial statements, meeting with management, speaking with suppliers, customers and competitors, we believe managers can develop an edge regarding the outlook for individual companies. We will often research a stock only to uncover no special view; we let a lot of pitches go by before we find a stock we like in which we believe we have found an edge.

However, innovation, business expansions and turnarounds take time. While investment managers may have confidence in a company’s growth plans, whether that expansion takes one quarter or one year to bear fruit can be hard to know. Hence, taking advantage of fundamental research often requires lengthy holding periods. We generally expect to hold stocks for three to five years.

Known Unknowns: 

• The level of the stock market on a particular date in the future. Stocks receive cash flows last in the capital structure, so any new information that can affect instruments senior to equities can also affect equities: Political events. Economic events. Interest rate moves. Industry dynamics. Management changes. Product innovation, etc.

Equity prices are continuously updating to reflect the constant stream of new information that could affect the stock. As described above, we believe we can get to know individual companies well through deep fundamental analysis. But the market as a whole is much better at aggregating all the information that could affect any of the thousands of companies in the stock market than any investor could possibly be. Think of an individual trying to compete against a supercomputer that is composed of an almost infinite number of microprocessors working in parallel crunching vast amounts of data as it pours in. The computer isn’t perfect and may not have wisdom, but it has a huge advantage over the analyst. In the short-term, equity markets contain the bulk of available information that should affect stocks.

As a result, predicting where the Dow will close on a given date is like trying to predict where ocean waves will splash against the Newport Beach pier at a given moment in time. While oceanographers can tell us the general time and average level of high and low tide, they know the natural dynamism of the sea limits their precision to forecasting trends and averages rather than point estimates. We believe the same is true for forecasting the stock market as a whole.

To understand the second question, the downside of being wrong, it is important to consider who is making the prediction. One common group of predictors work for broker-dealers, generating investment ideas hoping investment managers will find their ideas interesting and reward them by trading with their firms. They are incentivized to offer as many ideas as possible. Some are bound to be thought-provoking, and there is little downside if their predictions are wrong: They aren’t actually investing based on their views.

 

In contrast, investment managers are seeking to generate attractive returns for their clients. Managers make decisions based on their outlook for securities and if they are wrong, there is downside: Clients may not perform as well as they hoped. While PIMCO has sought to generate strong performance for our clients over our 40-year history, we aren’t perfect, and we work hard to get as many of our calls right as possible. 

 

Most of the commentators predicting the level of the Dow at year-end are sell-side analysts rather than investment managers. This makes sense: There is little downside for being wrong most of the time. The interesting question for the investment managers who do partake in such fortune-telling is do they actually utilize their own predictions? Most equity investment managers are managing portfolios that are required to be fully invested in equities at all times. If they believe the Dow will close at 13,000 on December 31, can they actually take advantage of that view since they don’t have idle cash to put to work? And if they can’t use their own predictions, why are they making them in the first place?

If we’re right – and neither PIMCO, nor anyone else, can accurately predict the level of the stock market at a certain date in one week, one month or one year – why do so many sell-side analysts (and a few investment managers) make such predictions? And why do we pay any attention?

 

I will answer my question with a question: Why do millions of people watch professional wrestling, “The Real Housewives” or “Jersey Shore?” It makes for entertaining television.

 

My hope from this piece is not that you stop watching business television. I certainly watch regularly and I also participate, sharing PIMCO’s views. I think it is a unique medium in which to follow markets and quickly hear a variety of perspectives on important topics.

 

My hope is that it becomes a little easier to distinguish thoughtful commentators discussing knowable economic topics from entertainers throwing darts.

 

In conclusion, I will leave you with my very own bold prediction. I am utterly unqualified to make it. I have no information edge nor can I possibly influence the outcome. In addition, there is absolutely no downside to my being wrong. Are you ready for it? “The Cleveland Browns will win the Super Bowl.” You heard it here first. (Note: I didn’t specify in which year.)

All Eyes on Europe--- All Facets Covered

Mark Kiesel 

• Germany and other strong sovereign balance sheet nations in Europe have to make a choice: continue to provide financial assistance to countries with more debt and assist in helping to restructure the debt of some European peripheral countries, or potentially move forward with a smaller, stronger group of countries - or at the extreme walk away from the Euro and the European Union all together.
• Without bold and coordinated action from European policymakers and the ECB, we can expect financial markets remain on edge; causing volatility to remain elevated until equity capital is injected into weaker European banks and permanent term financing is provided to those solvent European peripheral sovereign countries.
• We believe investors should wait to see whether policymakers can be effective in formulating a coordinated and credible solution for Europe before taking on more risk. In the near term, we favor focus on maintaining higher-than-normal cash balances, investments in areas with strong fundamentals and balance sheets and staying defensive in non-cyclical sectors as well as in investments senior in the capital structure.
• 
  
• ​The question on everyone’s mind these days is whether policymakers can contain the European sovereign debt crisis. Europe has roughly the same amount of government debt as a percentage of GDP as the United States. However, the magnitude of Europe’s total debt is not the issue in our opinion, it is the distribution. Germany has a lower, sustainable debt level whereas some peripheral European countries do not, particularly at current interest rates. As part of Europe’s entire Economic and Monetary Union (EMU), participating countries don’t have the benefit of an independent currency and monetary policy. This means countries with higher debt lack the ability to devalue their currencies in an attempt to improve exports. Monetary policy is also set for the EMU by the European Central Bank (ECB), which limits options for peripheral countries needing more accommodative policies. For many peripheral European countries these factors are major headwinds to growth which means to stay competitive these countries must move forward with structural reform. Yet, significant fiscal austerity and reform may prove so challenging that a few of the most leveraged European peripheral countries, like Greece, may have to restructure and leave the Euro in order to restore competitiveness and debt sustainability. Ultimately, Germany and Europe’s other strong sovereign balance sheet nations will have to make a choice: continue to provide financial assistance to countries with more debt and assist in helping restructure the debt of some European peripheral countries in order to keep the EMU intact, or potentially move forward with a smaller, stronger group of countries – or at the extreme even walk away from the Euro and the European Union.The importance of the European sovereign debt crisis should not be underestimated. Simply put, Europe remains a main driver of “animal spirits” and volatility (see Figure 1) in financial markets and can significantly shape the outlook for the global economy. The risks associated with the sovereign debt crisis are significant. What was initially perceived as a liquidity crisis is increasingly becoming a solvency crisis for a growing list of European countries. Timing is critical as financial markets appear to be moving faster than policymakers’ ability to come up with a credible solution. 
As interest rates increase on higher-debt European countries in the south, debt sustainability will be increasingly tested. The fact that financial markets are effectively marking-to-market European government bonds and interest rates in real time means the European financial crisis is spreading quickly into their banking system since many banks have large exposure to European sovereign debt. While central banks have provided liquidity support so banks can get short-term funding, a fiscal and growth solution is needed to restore confidence in vulnerable European sovereign balance sheets as well as in numerous European banks (see Figure 2), which increasingly appear under-capitalized and exposed to deteriorating sovereign credits.
  
  
  
  
  
  Balance sheets not engaging
  The longer policymakers wait, the more likely Europe’s financial crisis will deteriorate. And, all eyes are on Europe now for good reason because the risk of a global liquidity trap has increased as many healthy balance sheets around the world are also refusing to engage. Multinational companies which have low leverage and high cash balances aren’t aggressively spending and hiring due to an uncertain outlook. Emerging market sovereign balance sheets have yet to commit to provide significant financial assistance to Europe as these nations want to see a united Europe and clarity from policymakers, mainly from the German government, given the country’s leading role in shaping policy for the region. While the healthiest sovereign balance sheets in Europe have the ability to help, many appear to lack the will. As an example, many Germans want to see more austerity, significant deficit reduction and structural change in peripheral countries before they increase financial support beyond current commitments. Yet, too much deleveraging at once could throw Europe into a severe recession which would have significant negative implications for the global economy.
  On the policy front, a wait-and-see or “conditional love” approach to solving the European crisis will not be effective in our opinion given that the asset sides of European banks’ balance sheets are being marked-to-market in real time by financial market participants who seem to increasingly fear the unknown and refuse to take heightened levels of risk. We believe European policymakers should take several actions to help restore confidence in markets. 
  First, policymakers should make clear which European sovereigns will be backed unconditionally through explicit guarantees and assist those sovereigns whose debt will ultimately be restructured. 
  Second, the European Financial Stability Fund (EFSF) should be converted into an equity funding vehicle which can reequitize banks and provide term financing to solvent European sovereigns at interest rates which allow for sustainable debt service. 
  Third, while many European peripheral countries will likely need to embrace significant budget cuts and challenging austerity measures, policy leaders should balance higher taxes and spending cuts with pro-growth structural reform which promotes privatization and allows for workers to remain productive and employed longer given the need to increase retirement ages.
  Fourth, a few of the highest debt European peripheral countries deemed to be insolvent may have to exit the EMU and Euro currency in order to restore debt sustainability and competitiveness. Finally, the ECB should ease monetary policy and stand more aggressively behind solvent European sovereigns by acting decisively as a lender of last resort.
  Without bold and coordinated action from European policymakers and the ECB, we can expect financial markets to remain on edge; causing volatility to remain elevated until equity capital is injected into weaker European banks and permanent term financing is provided to those solvent European peripheral sovereign countries. In the meantime, we expect the global banking system and other balance sheets around the world will continue to hoard cash. Without a unified Europe and a bold plan of action, we face the risk of a global “paradox of thrift” where balance sheets won’t engage and credit creation will remain restricted without stronger fiscal commitments. This ultimately puts Germany and the other northern European countries in the driver’s seat in influencing whether or not the EMU will remain together or break apart. Yet, the longer Europe’s crisis lingers the more likely we could experience a disorderly outcome.
  
  
  Global growth slowing
  
  The timing of the European sovereign debt crisis could not be worse as global economic growth is already slowing in both the developed and developing world. In developed economies, fiscal policy may be less able to offset a deleveraging private sector as government debt has reached a high enough level in many developed countries that fiscal stimulus is simply not an option. In the U.S., total federal, state and local government debt has increased from 53% of GDP in the 2nd quarter of 2008 to 81% today (see Figure 3). While some may argue the U.S. still has some near-term ability to stimulate fiscally, growing political opposition to deficit spending and political gridlock, combined with the need to reduce longer-term deficits, suggest that going Keynesian in a major way is increasingly unlikely. Given these conditions, fiscal policy in many regions of the developed world is becoming a less viable option.
  
  In addition to constraints on the fiscal side, monetary policy is also becoming less effective in the developed world due to what many believe has become a liquidity trap, particularly in the U.S. As an example, multi-national companies in the U.S. continue to focus on hoarding cash (see Figure 4) and rebuilding balance sheets while consumers increase savings, pay down debt and remain extremely pessimistic (see Figure 5). With companies concerned about an uncertain outlook in Europe as well as a delevering consumer in the developed world, the outlook for hiring and capital spending will likely remain challenging. As such, we believe monetary expansion is less effective in developed economies that lack aggregate demand and animal spirits. Simply put, many balance sheets in the developed world are refusing to engage due to an uncertain outlook. Overall, we expect real economic growth in developed economies to approach stall speed or zero over the next year due to weak consumer and investment spending as well as governments transitioning into a headwind to economic growth because of their stretched public sector balance sheets.
  
  
  In the emerging markets, countries such as China, which went Keynesian in 2009 through an enormous fiscal stimulus program targeting infrastructure, now appear focused on a longer-term transition toward domestic consumption in order to prepare their economies for more balanced growth and stability over a secular horizon. In addition, policymakers want to keep inflation under control. As such, Keynesian fiscal stimulus on a global scale appears less likely in emerging markets. In fact, emerging market leaders appear hesitant to put their sovereign balance sheets at risk in providing financial support to Europe without more clarity and certainty. While countries in emerging markets have significantly less public and private sector debt (see Figure 6) than in the developed world, their economies will likely be negatively impacted by weaker growth in developed economies. While a weaker global growth outlook could lead to more monetary stimulus in emerging market economies, we expect real economic growth to slow in the emerging markets to a level of roughly 4–4 ½% (with the large economies of Brazil, Russia, India, China and Mexico expected to grow at a combined 5–5 ½% real rate) over the next year due to weaker export and investment growth.
  
    
  Investing in an uncertain world 
  
  European sovereign concerns, an increasingly fragile European banking system and slowing global economic growth suggest investors should consider a more defensive and conservative approach. Balance sheets around the globe are watching whether European leaders have the ability and willingness to restore confidence in both European sovereign balance sheets as well as in European banks.
  We believe investors should wait to see whether policymakers can be effective in formulating a coordinated and credible solution for Europe before taking on more risk. The ECB and other central banks are helping to inject liquidity into the system, which is providing near-term support for European banks. Nevertheless, banks generally remain extremely hesitant to lend to one another (see Figure 7). In addition, without a fiscal solution, the capital needs of European banks will likely remain unresolved as investors will watch the prices and yields on European government bonds, a major holding on bank balance sheets, adjust in real time.
  
  The uncertainty caused by the lack of clarity surrounding whether or not European peripheral government debt is “money good” or not will keep investors on the sidelines. European governments with significant debt levels as well as European banks with exposure to weaker European sovereigns are increasingly likely to be cut off from the capital markets until a credible and decisive fiscal solution evolves. This will likely negatively impact the flow of credit in the private sector by tightening credit availability and raising borrowing costs in an economy which is already fragile. 
  
  
  What to do?
  
  In the near term, we believe a higher-than-normal cash balance focus and favoring select investments in areas where fundamentals remain healthy to be attractive. Specifically, we believe investments in the following select areas deserve consideration:
  • The equities and debt in select multinational companies with strong balance sheets
  • Emerging market equities and sovereigns, and corporates where growth remains supportive
  • Bank loans (see Figure 8) and senior secured debt with significant asset coverage
  • U.S. bank debt (senior) given strengthening capital and balance sheets (see Figure 9)
  • High quality municipal bonds in states with strong balance sheets and in essential services such as water and sewer, power and airports
  • Hard assets and resources with favorable demand and supply dynamics
  
  
  
  
  
   

  Despite an uncertain global macro environment, we are finding some opportunities in the above sectors where we feel valuations are compelling. We believe investments in these areas have the potential to increase a portfolio’s yield by owning what PIMCO refers to as “safe spread.” In an environment where the 10-year U.S. Treasury is yielding less than 2%, we are finding that select credit investments with strong fundamentals can potentially increase those yields while maintaining a defensive posture. The above areas are specific sectors where we believe growth and balance sheets are strong, credit fundamentals are stable-to-improving and valuations are compelling.

  Given a slower growth outlook, we favor BB-rated credits in the high yield market as opposed to CCC-rated and highly levered companies. In addition, we believe credit risk should be taken at the top of the capital structure as well as in non-cyclical, defensive sectors. Our credit analysis is focused on stress testing companies and investments in a slower global growth environment where the risk of recession has increased. In addition, our research is focused on a company’s sources and uses of cash, debt maturity profiles and cash flow analysis. We believe less leveraged companies with high cash balances and low near-term funding needs should perform well. We favor U.S. credit within the developed markets, particularly relative to European credit (see Figure 10) as their corporate credit trades too tight relative to the sovereign. Emerging markets are favored over developed markets given stronger balance sheets and a healthier growth outlook.
  
  All eyes on Europe
  
  Given slowing global economic growth and significant uncertainty surrounding the European sovereign debt crisis, we believe it is wise to take a conservative and defensive stance. For many reasons previously discussed, both public and private sector balance sheets are not engaging and are instead taking a wait-and-see approach. High public sector debt in many developed economies has led to a lack of will to go more Keynesian. Importantly, this isn’t just a public sector issue. Healthy balance sheets which appear to have the ability to stimulate are currently not engaging. As evidence, many companies are hoarding cash, which we believe is increasing the risk of a global “paradox of thrift” where higher saving and lower spending suggest a more challenging outlook for global economic growth. This dilemma, combined with what many have described in the U.S. as a liquidity trap, further explains why fiscal and monetary policy have become less effective in the developed world where the private sector lacks animal spirits and continues to delever.
  
  The lack of policy coordination and a unified front in Europe combined with increasingly stretched sovereign balance sheets in the developed world are proving to be significant challenges for the global economy. It also suggests politics may increasingly influence outcomes, financial markets and the economic outlook. In our opinion, the effectiveness of policymakers should also be questioned given that fiscal and monetary stabilizers appear to have become less useful in a world which continues to lack confidence and faces significant uncertainty, particularly in developed economies where aggregate sovereign debt levels remain elevated and where fiscal stimulus is becoming less viable.
  The combination of political, economic and policy implementation risks all argue for maintaining a conservative, defensive approach. We believe investing in a world of heightened uncertainty means maintaining higher cash balances than normal, focusing investments in areas with strong fundamentals and balance sheets and staying defensive in non-cyclical sectors as well as in investments senior in the capital structure. When looking to increase risk, we will remain patient and continue to focus on Europe for signals as to whether or not European policymakers can establish a united front, act decisively and deliver on a bold, sizeable and coordinated solution to the European sovereign debt crisis. In the meantime we focus on select investments where fundamentals remain supportive; such as equity and debt in select multinational companies, emerging market equity, sovereign and corporate debt, bank loans and senior secured debt, U.S. bank debt at the top of the capital structure, high quality municipal bonds and hard assets and resources with favorable demand and supply dynamics.
  
  Mark Kiesel

  Managing Director
  23 September 2011

US sovereign Downgrade impact : The Thunderstorm

Standard and Poor's, alongwith other rating agencies had kept US's AAA/ rating on Credit Watch in March and were to review in Mid July. Accordingly, S&P, had expressed 'Dissatisfaction' reflecting the U.S. Debt  over Extended Debate. The US Law makers failed to plan  for the ' Debt Reduction' and/or the method to raise money either through ' Increasing Taxation' Or through 'Cutting Spending'.

As promised Standard and Poor's went ahead and downgraded US Sovereign Ratings to AA+. 



                                    S&P had discussed about the implication of this Action, 

1) We would downgrade the debt of Fannie Mae, Freddie Mac, the ‘AAA’ rated Federal Home Loan Banks, and the ‘AAA’ rated Federal Farm Credit System Banks to correspond with the U.S. sovereign rating. 






2) We would also lower the ratings on ‘AAA’ rated U.S. insurance groups, as per our criteria that correlates insurers' and sovereigns' ratings. 


3)  In addition, we would lower the ratings on clearinghouses Fixed Income Clearing Corp., National Securities Clearing Corp., and Options Clearing Corp. as well as on The Depository Trust Co., a CSD. 

This reflects our view that their clearing businesses are concentrated in the domestic market and they are correlated with the U.S. economy. We assess the impact of this scenario as moderate for funds and low for all other financial institutions sectors.

4)  Impact on Funds:
 a) The ratings implications for FCQRs and PSFRs would vary. Would have an impact on funds with exposure to long-term U.S. Treasury and U.S. government securities, but not on funds with short-term investments. For FCQRs, we apply a lower credit score on investments in short-term (365 days or less) U.S. government securities than longer-term investments (more then 365 days). The 73 FCQRs that we placed on CreditWatch negative have significant exposures to U.S. Treasury and U.S. government securities that mature in more than 365 days.
 We would downgrade these 73 funds to reflect the lower long-term rating on the U.S.
  { Principal stability funds, on the other hand, seek to maintain stable and accumulating net asset values, and they invest in short-term debt instruments. As long as the short-term U.S. sovereign rating remains at ‘A-1+’, as we outline, we believe that lowering the long-term rating into the ‘AA’ category would not have an impact on the ratings on these funds because the credit quality of the U.S. would still meet the credit quality standards for all PSFR categories. Barring any potential price volatility associated with the lower long-term rating, the short-term rating on the U.S. government remaining at ‘A-1+’ would effectively be business as usual for the money market fund industry }

All other global financial services:

5)   We would expect there to be few rating actions (including outlook changes) on specific companies. In most cases, this would reflect that their businesses, operating earnings, and assets are largely U.S. based. In either instance, we don’t expect liquidity to be a critical issue for companies. Furthermore, we do not expect the knock-on effects of the lower U.S. sovereign rating in scenario 2 to lead to additional downgrades immediately in the financial services industry.
 6 )  In these scenarios, we would evaluate each company on a case-by-case basis, taking into account macroeconomic conditions and their own financial strength. If we do take rating actions, we could expect to downgrade companies that have a significant U.S. presence, with most of their business and assets in the U.S., or companies in Europe with sizable positive correlations to the U.S. insurance or banking sectors.
7)   We would take fewer rating actions, and more slowly, on financial services companies in Asia-Pacific and Latin America--if indeed we took any.


Conclusions : US down grading may Have Massive Loss of Confidence and Confusion. Recently, I posted many views from Alan Greenspan, PIMCO, And Neil Kashkari, all propounded this. I had Predicted this as ' Black Swan Event' which Market Had not Envisaged and Leave Only factored.
1) The Housing Market and Housing Finance in US and Europe shall have Deep Crators.
2)  The 401( K) Funds and Other Pension funds, Insurers like AIG, Berkshire, MET, Prudential.
3)  The Excessive ' Cash Rich ' Companies like Apple, Microsoft and Bankers will have Treasury Losses. 
4)  The ' Value Erosion' might Have Compounding Effects on Commodities, Trading Houses. 

US Debt is Gold Standard ...? Asks Neel Kashkari.

 ( PIMCO, the biggest Debt fund Managing company, has many ' super Brains'  one of its catch is Neel Kashkeri, son of Indian Kashmiri Immigrants to US.    The Blue eyed Boy, profile on P.I.M.C.O: (Mr. Kashkari is a managing director and head of new investment initiatives in the Newport Beach office. Prior to joining PIMCO in 2009, Mr. Kashkari served in the U.S. Treasury Department from 2006-2009, first as senior advisor to Secretary Henry Paulson and then as Assistant Secretary of the Treasury. In the latter role, he established and led the Office of Financial Stability and oversaw the Troubled Assets Relief Program (TARP). Before joining the Treasury Department, Mr. Kashkari was a vice president at Goldman Sachs in San Francisco, advising technology companies on financings and mergers and acquisitions. Previously, he was an aerospace engineer at TRW Corporation. He holds both bachelor's and master's degrees in engineering from the University of Illinois at Urbana-Champaign and an MBA from the Wharton School at the University of Pennsylvania)

Neel, has raised the basic question, Whether value lies in the Hands of Beholder..?

Surely, Gold is Gold, because all call it Gold and are ready to pay for it. 

The removal Gold Standard in 1972.

When President Nixon, removed Gold standard and Forced $ in.1972 .  World was put to test, by explosion in Crude prices, The $ became entrenched in international trade, as a corridor and US Bonds the prize.  The International development heaved on Crude, which remained undervalued through out 80-90's. The 'Camp David',  agreement in 1979, between Israel and Egypt cemented the ' Crude' revolt. Simultaneously, the OIL Producing nation were galvanized under the umbrella of O.P.E.C.and Monarchy's were set up in Egypt, Syria, Libya, Iraq.to counter the threat of Khomeni in Iran and also as Allies against USSR. NOW the whole Edifice is crumbling across the Middle East and Libya. The recent OPEC meeting showed the deep fissures, and soon OPEC may will have its count.

 Does all this politics have further bearing on 'Fall Of $' and vis a vis.?

Could a U.S. debt downgrade trigger a financial crisis?

We approach Treasury’s debt-ceiling deadline, attention has shifted from the risks of a default on Treasury debt to the risk of a downgrade of U.S. credit. Many are asking whether a downgrade could itself lead to a financial crisis. With the example of 2008 still fresh in many minds, the question has become: Would it be as bad as the Lehman Bros. bankruptcy?

Some market observers speculate that a downgrade would be a non-event: Japan, for example, went from a rating of AAA to AA without much drama. Others suggest that a downgrade would increase Treasury’s borrowing costs by $100 billion a year or more, making our already unsustainable deficit trajectory even worse.

There are no rules to define what is systemic and what isn’t — or to accurately predict the consequences of an economic shock. Each crisis is unique. How exactly it will affect financial markets, companies and our economy is impossible to know. Nonetheless, recent examples offer guidance.

In 2008, a number of once-cherished beliefs were turned upside down: (1) that home prices in America would never fall; (2) that AAA-rated subprime securities are sound; (3) that a major investment bank would never fail. Consumers, investors and companies allocated capital according to these truths. When the beliefs were revealed to be false, massive shocks were inflicted on the economy as financial markets rapidly adjusted to account for these new risks.

Banks had to reduce their leverage and rein in lending. Companies froze investment. Consumers cut spending and started saving. As a result, the economy plunged into recession, and millions of jobs were lost.Unemployment shot to 10 percent.

The question now is whether U.S. Treasury bonds, which anchor the global economy, really are the gold standard, the risk-free financial instruments they have been trusted to be. What will happen if that truth is revealed to be false?

Four factors in particular can help assess the magnitude of the financial impact from an undermined truth:

(1) How strongly is the belief held?

In 2008, investors around the world generally believed that major U.S. investment banks were so large they would never be allowed to fail. In the six months leading up to Lehman’s bankruptcy, however, it came under increased funding pressure and its stock price slowly collapsed. Markets were not completely convinced that the government would have the will or the ability to save Lehman; otherwise investors would have continued lending to it, as they did to Fannie Mae and Freddie Mac, which had no trouble borrowing money before they were rescued only days ahead of the Lehman bankruptcy.

By comparison, U.S. Treasurys have been defined for decades as the risk-free financial instrument throughout global financial markets. Faith in Treasurys is far stronger than it ever was in Lehman Bros. This suggests a far bigger shock than Lehman if this truth is proven false.

(2) How big an asset class does the belief support?

U.S. Treasurys are a $14 trillion market — the single biggest security market in the global economy. In comparison, Lehman had approximately $600 billion of liabilities before it failed, less than 5 percent of the size of the Treasury market. Treasurys are held by virtually all 8,000 banks in America and nearly all insurance companies, corporations, pension plans and millions of individuals’ 401(k)s. This scale suggests a far larger shock than Lehman.

(3) How wrong was the belief?

Here, Treasurys are not as bad as Lehman. Even if the U.S. credit rating is downgraded, almost no one believes we will actually default on our debt. The United States is not entering bankruptcy, and its debt is not junk. Lehman debt ultimately proved to be worth a fraction of its face value. To some, this suggests a U.S. downgrade would produce a more modest shock than Lehman. But a small deviation from a cherished belief can be as shocking as a large deviation from a weaker belief.

(4) What is the economic context in which the shock is taking place?

Although the United States is technically no longer in recession, the U.S. economy is growing slowly. Unemployment remains at 9.2 percent. Europe is awash in its own fiscal crisis, and much of the developed world is struggling. When Lehman collapsed, U.S. unemployment was at 6 percent, but the economy was contracting and housing markets were plummeting. The global economic context in September 2008 was probably worse than today, but our economy remains vulnerable.

These factors suggest that a U.S. downgrade has the potential to be as bad or perhaps worse than the Lehman shock. The more strongly held a belief, and the larger the asset class it supports, the greater the potential damage to the economy when the belief is turned upside down. We may not be certain what will happen if U.S. credit is downgraded, but there is no upside to finding out.

 ( Tip : What is a Gold Standard : The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold.-- wikipeadia.

 2) The U.S. used a gold standard from its inception in 1789 until 1971, a stretch of 182 years. In 1965--not that long ago--all major countries in the world participated in the worldwide gold standard system known as the Bretton Woods arrangement.)