Will politicians make common breath..? explains Neel Kashkari

Chaos Theory

• Debating a future of inflation vs. deflation is radically new territory for investors. The chaotic nature of the choice facing societies is whipsawing equity markets and dominating bottom-up factors.
• Equity investors seem to be pricing in a combination of outcomes, with the largest weighting going to a goldilocks, mild inflation scenario. But the market’s large daily swings reflect jumps back and forth as investors update the probabilities of very different destinations.

Once per quarter investment professionals from across PIMCO’s global offices gather in Newport Beach for our Economic Forum. These sessions have been the foundation of PIMCO’s investment process for years; we debate and update our short-term and long-term views for the global economy, and, from that, for individual asset classes, such as government bonds, corporate bonds, mortgages and stocks. Last month we gathered for our December Forum and the topic that dominated the discussion, as it has in recent quarters, was the fate of the euro. Will the eurozone break up? Will European governments impose extreme, deflationary austerity to control their deficits? Will the ECB monetize the region’s debts and risk inflation in order to preserve the common currency? 

This is a debate that has raged within PIMCO for quite a while. There is a wide range of opinions, each supported by relevant precedents and sound economic reasoning. Yet despite our intense focus, we don’t know the answer with certainty. 

Here in America we too face a similar question, though markets are not currently demanding an immediate answer. For the last few decades America has fueled its economic growth by borrowing and consuming, and, in doing so, has racked up large, unsustainable debt. Families that take on too much debt must eventually cut spending, either to pay back loans, or at least because banks stop lending them money. They are eventually forced into some combination of austerity and default. But countries with their own currencies have a choice: 1) austerity-induced deflation, or 2) print money and eventually trigger inflation, which makes their debts easier to pay off, while robbing creditors of the real return they were promised. Will we find the political will to cut spending? Or will we continue running large deficits? Will the Federal Reserve resume quantitative easing, in effect monetizing our debts? Will it unintentionally trigger inflation?

Listening to my colleagues make their arguments during the Forum, I was taken back to my days fifteen years ago when I was an engineering graduate student at the University of Illinois. You may wonder what a debate about the global economy has to do with engineering. It reminded me of one of my favorite classes: nonlinear systems – the study of natural and man-made systems that, at times, behave very oddly. Allow me to explain.

Most systems we interact with every day are linear: if you change an input to the system by a small amount, the output will also change by a small amount. Think about driving to work: if you leave your house 10 minutes early, you will usually arrive about 10 minutes early. If you turn up the flame on a stove a little, the pot of water will heat a little faster.

But some systems, under certain conditions, behave very differently. These systems are said to have “sensitive dependence on initial conditions” – very small changes of the inputs can lead to enormous variations of the output. Mathematicians have given these systems the label of being “chaotic” and experts in the field are called “chaoticians.” (The term “chaotician” always struck me as ridiculous. Could you imagine introducing yourself this way?) The weather is the best example of a real-life chaotic system. Predicting the weather beyond a few days is impossible because minor variations lead to large changes in the future. Go back to the driving example: if you leave 10 minutes late, rather than 10 minutes early, you might hit rush hour, and the extra 10 minutes ends up costing you an hour. Chaos theory describes the conditions under which a system changes from linear and smooth to highly nonlinear and violent, where minor changes to the inputs will lead to enormous variations of the output.

Western societies are facing a seemingly minor choice, but that choice will lead to vastly different endpoints for the global economy and for asset prices.

In a “normal” economic environment investors debate a narrow range of outcomes: will the U.S. grow by 2.8% or 3.2%? Will inflation remain at 2.0% or climb to 2.3%? Debating a future of inflation vs. deflation is radically new territory for investors. The chaotic nature of the choice facing societies is whipsawing equity markets and dominating bottom-up factors.

While we don’t know with certainty which path societies will choose, we can identify a few potential outcomes and make reasoned assessments of what they mean for the economy and for equities:

1. Austerity and deflation

Borrowing money to consume allows families and societies to live beyond their means – for a time. Once the debt accumulation has run its course, reality has to set back in. For a family that may mean getting rid of a second car, dining out less often or cuts which are far more painful. It necessarily means consuming less, and to the extent that consumption equates to standard of living, it likely also means a reduced living standard. Societies face a similar challenge. The U.S. and parts of Europe have enjoyed exaggerated living standards enabled by borrowing from our future. Now that creditors are warning us they won’t let this continue forever, governments may reach consensus to cut spending and/or increase taxes to bring budgets into balance. Whatever the mix, by definition this likely means lower economic growth and perhaps a lower level of overall economic activity until debts are worked off and real growth restored. Deflation runs the risk of creating a vicious cycle, where prices fall, causing wages to fall, causing spending to fall, causing prices to fall further. This is a lower risk for a growing population such as in the United States, whereas Japan continues to suffer from such stagnation today. Europe’s demographics are much worse than America’s. The outlook for equities in this environment is negative in the short run and potentially very negative in the long run if a deflationary cycle kicks off. Corporate earnings at some point must be linked to economic growth, and stock prices represent the present value of a future stream of earnings. In a deflationary environment cash will be king – because your purchasing power will increase by just sitting on the sidelines.

2. Explicit default
The scenario of governments not paying back their creditors is extremely unlikely for countries that have their own currencies. Why default on your debt, which would trigger a crisis of confidence in your economy, when you can simply print more money? Of course, unpredictable politics can make the unthinkable possible, as we came dangerously close to seeing this summer with Washington’s debt ceiling debacle. In Europe it is likely some smaller countries, such as Greece, will default on their debt. They simply have taken on more debt than their economies can reasonably hope to pay back. And they don’t have their own currency, so printing drachma is not an option. It is hard to imagine a scenario where an explicit default would be good for equities. Just how bad depends on the size of the country defaulting and the extent of the preparations put in place to minimize the damage. For example, if countries have capitalized their banks to withstand the losses from a Greek default and the ECB funds Italy and Spain so they are not at risk of contagion, the impact to equities should be more muted. An uncontrolled default, or a default of a larger country would be very bad for risk assets and could trigger a deflationary spiral described above.

3. Mild inflation
Mild inflation is the goldilocks scenario: central banks print money to help fund governments while they employ structural reforms to make their economies more competitive and generate long-term growth. Such structural reforms take time to produce results, often many years. Printing money provides governments with that time while, in theory, reducing the sacrifices citizens must make, and the inflation that usually follows makes the fixed debt stock easier to service, because prices (and hence taxes) increase. It often results in a falling currency, which makes exports more competitive. It is easy to see why countries with their own currencies usually choose inflation as the preferred response to overwhelming debt. Although creditors suffer because the purchasing power they were expecting has been reduced, society has to make fewer hard choices and can continue to enjoy its exaggerated standard of living until the pro-growth economic reforms come to the rescue. In a scenario of mild inflation, equities should do well. Prices are contained, the economy functions and corporate profits should continue increasing. Of course, if policymakers do not use this time to implement real economic reforms, which can still be painful for certain constituencies, mild inflation doesn’t solve anything. It just delays the necessary day of reckoning.

4. Runaway inflation
The danger of mild inflation is that it may not remain mild. Inflation is driven by expectations, the collective beliefs of what the future holds that reside in the minds of millions of people. If people expect prices to go up, they will demand higher wages so they can maintain their standard of living. This will increase the cost of labor, pushing the cost of goods higher. A vicious cycle of inflation can take hold as prices climb higher and higher. The U.S. suffered from double-digit inflation in the 1970s, and in an extreme case, Germany suffered from hyper-inflation following World War I. Runaway inflation is devastating because an economy loses its anchor. People are afraid to hold cash because their purchasing power drops rapidly and so they must hoard real assets. Interest rates soar causing investments to plummet. Central bankers are generally afraid of attempting to induce mild inflation for fear they may nudge expectations more than they hoped. Nudging the collective beliefs of millions of people is an inexact science. The Federal Reserve is cautiously experimenting with its expectations-nudging-arsenal with its recent communication innovations. Runaway inflation would be very bad for most risk assets and equities in particular because of the devastating affects on real economic growth and the increases in costs of production and of capital. A loss of faith in paper currencies would mean gold and real assets would likely be king.

5. Miraculous growth
A list of potential solutions to our unsustainable debt load would be incomplete without including a high growth scenario. It is true there could be a major breakthrough in, for example, energy technology that spurs extraordinary economic growth, which would drive tax revenues higher and enable governments to pay down their debt without asking their citizens to give up their exaggerated living standards. In such a scenario, equity returns would likely be very strong, especially for the sector enjoying the innovation. The technology sector in the 1990s was an example. However, such a scenario today is low-probability. We invest based on what we think is likely to happen, rather than what we would like to happen. Policymakers can’t count on a growth miracle and neither can investors. And don’t forget the bumper tax revenues of the 1990s actually led to increased government spending in some cases when politicians wrongly assumed the increased tax revenues would last forever.

While the expected value of two equally possible outcomes, 0 and 1, is 0.5, there is zero chance the outcome will actually be 0.5. It will either be 0 or 1. Based on the level of the stock market today, with a price to earnings ratio of about 13x in the developed world and 11x in the emerging economies, equity investors seem to be pricing in a combination of these outcomes, with the largest weighting going to the goldilocks, mild inflation scenario. But the market’s large daily swings reflect jumps back and forth as investors update the probabilities of these very different destinations.

I believe societies will in the end choose inflation because it is the less painful option for the largest number of its citizens. I am hopeful central banks will be effective in preventing runaway inflation. But it is going to be a long, bumpy journey until the destination becomes clear. This equity market is best for long-term investors who can withstand extended volatility. Day traders beware: chaos is here to stay for the foreseeable future.

Why Lender's On Strike..? Chicken and Egg

Who is the first..?

The Jackson Hole, is an Important place for the US and International Banking Industry, and More so, from Last year. Markets were looking Hungrily for more stimulus, or feeling of Stimulated by moves, by Dr Bernanke, who never disappoints them. But, all this stimulus are ending in short term, upsurges and then, disappointments all over. No doubt, the expectations and stimulative messages, are creating ' Hopes ' alas for short time. They are not working where they are supposed to act. Its like a patient on Ventilator, no sooner Ventilator is removed the patient is still gasping. 


The Three major area where its not working are 1) Housing 2) Employment 3) Credit Demand and Bank Lending.
One and all , are wondering, as to why banks are not Lending, Inspite of interest rates being so low are say Lowest, for such long time..? The treasury incomes falling from the Cliff and Lying Low..? Why, they are not throwing the Money out of the Vaults and why People are not borrowing Money, even though the money is now almost available, for nothing. 


Why Lending Is So Dry..?
The most Important reason and quite a simple one is Lending is not Profitable..! Simply, no Lender would like to Commit the Money, now When the Interest rate is the Lowest. and Can't Go Down, any Further.
Any other way, every one is expecting and therefore Wants to start Lending When Rates Pick Up.


Lenders on Strike


No One Wants to Lend Money at a rate, which is near 0 %  and FED is determined to Kick-start the Economic Cycle by Easy Lending.


As, the Stand Off, Continuous Dr Bernanke has played Hard Ball of declaring the Low rates Upto 2013.

It'a All a Chicken and Egg game. 

Fannie Mae & Freddie Mac mirror the US Housing Ground Zero

Fannie Mae And Freddie Mac Second-Quarter Results Highlight Ongoing Housing Market Weakness

Results for Fannie Mae and Freddie Mac in second-quarter 2011 reflected ongoing weakness in the housing market. Credit losses remain concentrated in 2005 to 2008 vintage loans and hedging losses hurt profits. Operating losses and sizable dividends to the U.S. Treasury led these firms to request a combined $6.6 billion in additional capital from the Treasury to cover deficits. Standard & Poor's Ratings Services doesn't believe either institution has the capacity to generate sufficient earnings to cover annual dividends currently owed to the Treasury.

Net interest income at both firms was largely flat from the first quarter. Interest rates declined and helped to lower the cost of borrowing for both firms, but also kept returns on earning assets low. Both firms continue to purchase delinquent loans from sponsored trusts so as not to have to make payments to investors for nonearning assets.

Overview

• Second-quarter 2011 net interest income at both Fannie Mae and Freddie Mac was largely flat from the first quarter.
• Both institutions saw the overall seriously delinquent rate for their portfolios fall in the second quarter.
• Both firms continue actively to pursue home retention strategies and foreclosure alternatives to reduce their level of ultimate credit losses.

The Federal Reserve has announced that it intends to keep interest rates low until at least mid-2013. Historically, 30-year fixed-rate mortgages are about 150 to 200 basis points higher than the 10-year Treasury yield. Low rates on new mortgage production will continue to put pressure on the top line at both Fannie Mae and Freddie Mac.

Loan Loss Provisions Varied, And Delinquency Rates Dropped

Freddie Mac reported a higher loan loss provision in the second quarter versus the first quarter, reflecting more newly delinquent loans and a less favorable rate of transition into the seriously delinquent category versus the prior period. Conversely, Fannie Mae's loan loss provision declined sequentially to $5.8 billion in the second quarter from $10.6 billion in the first quarter. Fannie Mae stated that the decline in home prices was more severe in the first quarter, and that it was seeing better recoveries from its repurchase requests. Charge-offs at Freddie Mac were $3.1 billion in the quarter, up $0.1 billion from the first quarter, while Fannie Mae saw net charge-offs drop to $3.8 billion from $4.7 billion, which also reflects the better repurchase request recoveries.

Charge-off rates remain historically high, but have been somewhat subdued because of delays in the foreclosure process across the country. We still expect the $39 billion reserve at Freddie and $69 billion reserve at Fannie to substantially cover remaining embedded credit losses on the existing legacy portfolio vintages 2005-2008. These vintages now represent 35% of Freddie Mac's single-family portfolio and 34% of Fannie Mae's single-family portfolio, but continue to generate a majority of the total credit losses at each firm. We expect charge-off rates to rise once foreclosure delays are resolved and servicers are able to liquidate their backlogs of nonperforming loans, which could begin to happen later this year or in 2012.

Both institutions saw the overall seriously delinquent rate for their portfolios fall in the second quarter. Bad loans are being written off or restructured, and new, better-quality loans are growing as a percentage of their portfolios (nearly 50% at both). Freddie Mac ended the quarter with a seriously delinquent rate of 3.50%, down from 3.63% at the end of the first quarter. Fannie Mae's comparable rate was 4.08% versus 4.27% at March 31, 2011. We could see these trends leveling or reversing with continuing weak economic conditions. A number of states have changed their foreclosure laws or processes, and servicers have halted or significantly delayed the processing of foreclosures in those states. This has significantly lengthened the time it takes to foreclose mortgage loans in these states and could hurt single-family serious delinquency rates. Fannie Mae's single-family foreclosure rate decreased to 1.20% for the first half of 2011 from 1.45% for the first half of 2010.

Both companies continue to experience difficulties with 2005-2008 vintage loans, with the most stress in loans originated in 2006 and 2007. Loans originated since the beginning of 2009 have performed significantly better, and reflect better underwriting standards by banks and higher purchasing standards by the government-sponsored entities. We expect these loans, characterized by higher average FICO scores and lower loan-to-value ratios, also to perform somewhat better than loans originated before 2009 if the economy deteriorates significantly from here. So far, these loans have experienced historically low levels of delinquencies shortly after their acquisition. Specifically, 2009 and 2010 loans that went seriously delinquent by the end of the second quarter following their acquisition year were approximately 8x and 10x lower, respectively, than the average comparable serious delinquency rate for loans acquired in 2005-2008.

Reducing Losses

Both firms continue actively to pursue home retention strategies and foreclosure alternatives to reduce their level of ultimate credit losses. These strategies include modifications, forbearance, pursuing deeds-in-lieu, and preforeclosure sales, among others. The ultimate long-term benefit of modification and other home retention solutions is unknown, but recent data show that the early-term success rate for modifications has improved. For Freddie Mac, 85% of loans it modified in second-quarter 2010 were current or less than 30 days past due after 12 to 14 months, versus just 55% of loans modified in second-quarter 2009. Similarly, Fannie Mae says 73% of loans it modified in third-quarter 2010 were performing after nine months, versus just 45% of loans modified in third-quarter 2009. We expect these entities to continue to pursue foreclosure alternatives, which can speed up the sale process and preserve the values and prices of the homes in areas with significant home inventories. These strategies should continue to mitigate ultimate credit losses, though their reperformance and recovery rates could suffer if the economy slows significantly or home prices decline more than we anticipate. To the extent properties fall into the companies' other real estate owned through foreclosure, short sales, and the like, we believe they will judiciously dispose of assets so as to not flood any particular market. Such flooding could pressure prices, increase loss severities, and trigger further foreclosures.

Hedging losses were significant in the quarter for both firms because they typically hedge against rising interest rates to preserve the value of their largely fixed-rate portfolios, and interest rates declined. Freddie Mac posted a loss of $3.8 billion related to hedging in the second quarter, while Fannie Mae's loss from hedging totaled $1.7 billion. In many cases, the instruments being hedged are securities whose gains are not accounted for in income, but rather improve or reduce accumulated other comprehensive income (AOCI) on the balance sheet. Freddie Mac, however, saw wider spreads on its securities offset the benefit to its securities portfolio from rising rates. These losses should reverse when interest rates begin to rise.

Freddie Mac posted smaller credit impairments on its securities portfolio this quarter, down to $352 million from $1.2 billion in the first quarter. Fannie Mae's securities portfolio is smaller, and it posted a $56 million other-than-temporary impairment on its available-for-sale securities, up slightly from the first quarter. Each firm has seen its balance of AOCI drop during the past few quarters as positions are sold and prices rebound with added liquidity in the securities markets. A greater percentage of these unrealized loss positions could be realized if the economy deteriorates more than we anticipate, if market volatility causes liquidity to re-exit the market, and/or the quality of collateral underlying the securities worsens.

For the quarter, Freddie Mac posted a net loss of $2.1 billion versus net income of $676 million in the first quarter. Total other comprehensive income totaled $1 billion, reflecting the previously mentioned securities gains on its investment portfolio, so its total comprehensive loss was just $1.1 billion. Its net worth deficit was $1.5 billion at the end of the quarter, incorporating the comprehensive loss for the quarter, its $1.6 billion quarterly dividend to the U.S. Treasury, and its positive net worth entering the quarter. The Federal Housing Finance Agency (FHFA), as Freddie Mac's conservator, will submit a $1.5 billion draw request to the U.S. Treasury to cover the deficit, bringing the aggregate liquidation preference of its senior preferred stock position to $66.2 billion.

Fannie Mae posted a net and comprehensive loss of $2.9 billion in the quarter, versus a net loss of $6.5 billion in the first quarter. After preferred dividends to the Treasury of $2.3 billion, and incorporating a modest positive net worth entering the quarter, Fannie Mae had a net deficit of roughly $5.1 billion. The FHFA will also submit a request to Treasury on its behalf for funds to cover the deficit, bringing the total liquidation preference of its senior preferred stock to $104.8 billion following the draw. Freddie Mac and Fannie Mae will owe annual dividends to the Treasury of $6.6 billion and $10.5 billion, respectively.

We believe that these companies will most likely be forced to draw perpetually from the Treasury to cover losses and dividend payments absent any intervention or forbearance. Even if the companies can return to break-even core operations, we believe Treasury will continue imputing future dividends based on capital replenishment the companies have drawn from the Treasury to pay the current Treasury dividends.

Standard/Poor's Explains. Downgrade Politics or debt

Recent Rating Action On The United States of America

Overview

We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating.

We have also removed both the short- and long-term ratings from CreditWatch negative.

The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.

The outlook on the long-term rating is negative. We could lower the long-term rating to 'AA' within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.

Rating Action

On Aug. 5, 2011, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA'. The outlook on the long-term rating is negative. At the same time, Standard & Poor's affirmed its 'A-1+' short-term rating on the U.S. In addition, Standard & Poor's removed both ratings from CreditWatch, where they were placed on July 14, 2011, with negative implications.

The transfer and convertibility (T&C) assessment of the U.S.--our assessment of the likelihood of official interference in the ability of U.S.-based public- and private-sector issuers to secure foreign exchange for debt service--remains 'AAA'.

Rationale

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria. Nevertheless, we view the U.S. federal government's other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged. We have taken the ratings off CreditWatch because the Aug. 2 passage of the Budget Control Act Amendment of 2011 has removed any perceived immediate threat of payment default posed by delays to raising the government's debt ceiling.

In addition, we believe that the act provides sufficient clarity to allow us to evaluate the likely course of U.S. fiscal policy for the next few years. The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently.

Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a 'AAA' rating and with 'AAA' rated sovereign peers. In our view, the difficulty in framing a consensus on fiscal policy weakens the government's ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population's demographics and other age-related spending drivers closer at hand. Standard & Poor's takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.'s finances on a sustainable footing.

The act calls for as much as $2.4 trillion of reductions in expenditure growth over the 10 years through 2021. These cuts will be implemented in two steps: the $917 billion agreed to initially, followed by an additional $1.5 trillion that the newly formed Congressional Joint Select Committee on Deficit Reduction is supposed to recommend by November 2011. The act contains no measures to raise taxes or otherwise enhance revenues, though the committee could recommend them. The act further provides that if Congress does not enact the committee's recommendations, cuts of $1.2 trillion will be implemented over the same time period. The reductions would mainly affect outlays for civilian discretionary spending, defense, and Medicare. We understand that this fall-back mechanism is designed to encourage Congress to embrace a more balanced mix of expenditure savings, as the committee might recommend.

We note that in a letter to Congress on Aug. 1, 2011, the Congressional Budget Office (CBO) estimated total budgetary savings under the act to be at least $2.1 trillion over the next 10 years relative to its baseline assumptions. In updating our own fiscal projections, with certain modifications outlined below, we have relied on the CBO's latest "Alternate Fiscal Scenario" of June 2011, updated to include the CBO assumptions contained in its Aug. 1 letter to Congress. In general, the CBO's "Alternate Fiscal Scenario" assumes a continuation of recent Congressional action overriding existing law.

We view the act's measures as a step toward fiscal consolidation. However, this is within the framework of a legislative mechanism that leaves open the details of what is finally agreed to until the end of 2011, and Congress and the Administration could modify any agreement in the future. Even assuming that at least $2.1 trillion of the spending reductions the act envisages are implemented, we maintain our view that the U.S. net general government debt burden (all levels of government combined, excluding liquid financial assets) will likely continue to grow.

Under our revised base case fiscal scenario--which we consider to be consistent with a 'AA+' long-term rating and a negative outlook--we now project that net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act's revised policy settings.

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.

Our revised upside scenario--which, other things being equal, we view as consistent with the outlook on the 'AA+' long-term rating being revised to stable--retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021.

Our revised downside scenario--which, other things being equal, we view as being consistent with a possible further downgrade to a 'AA' long-term rating--features less-favorable macroeconomic assumptions, as outlined below and also assumes that the second round of spending cuts (at least $1.2 trillion) that the act calls for does not occur. This scenario also assumes somewhat higher nominal interest rates for U.S. Treasuries.

We still believe that the role of the U.S. dollar as the key reserve currency confers a government funding advantage, one that could change only slowly over time, and that Fed policy might lean toward continued loose monetary policy at a time of fiscal tightening.

Nonetheless, it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021. Our revised scenarios also take into account the significant negative revisions to historical GDP data that the Bureau of Economic Analysis announced on July 29.

From our perspective, the effect of these revisions underscores two related points when evaluating the likely debt trajectory of the U.S. government. First, the revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Consequently, the debt burden is slightly higher. Second, the revised data highlight the sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions. We believe the sluggish pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a persistent drag on demand.

As a result, our downside case scenario assumes relatively modest real trend GDP growth of 2.5% and inflation of near 1.5% annually going forward.

Standard & Poor's Explains, Why US is Downgraded

Recent Rating Action On The United States of America

Overview

We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating.

We have also removed both the short- and long-term ratings from CreditWatch negative.

The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.

The outlook on the long-term rating is negative. We could lower the long-term rating to 'AA' within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.

Rating Action

On Aug. 5, 2011, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA'. The outlook on the long-term rating is negative. At the same time, Standard & Poor's affirmed its 'A-1+' short-term rating on the U.S. In addition, Standard & Poor's removed both ratings from CreditWatch, where they were placed on July 14, 2011, with negative implications.

The transfer and convertibility (T&C) assessment of the U.S.--our assessment of the likelihood of official interference in the ability of U.S.-based public- and private-sector issuers to secure foreign exchange for debt service--remains 'AAA'.

Rationale

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria. Nevertheless, we view the U.S. federal government's other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged. We have taken the ratings off CreditWatch because the Aug. 2 passage of the Budget Control Act Amendment of 2011 has removed any perceived immediate threat of payment default posed by delays to raising the government's debt ceiling.

In addition, we believe that the act provides sufficient clarity to allow us to evaluate the likely course of U.S. fiscal policy for the next few years. The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently.

Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a 'AAA' rating and with 'AAA' rated sovereign peers. In our view, the difficulty in framing a consensus on fiscal policy weakens the government's ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population's demographics and other age-related spending drivers closer at hand. Standard & Poor's takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.'s finances on a sustainable footing.

The act calls for as much as $2.4 trillion of reductions in expenditure growth over the 10 years through 2021. These cuts will be implemented in two steps: the $917 billion agreed to initially, followed by an additional $1.5 trillion that the newly formed Congressional Joint Select Committee on Deficit Reduction is supposed to recommend by November 2011. The act contains no measures to raise taxes or otherwise enhance revenues, though the committee could recommend them. The act further provides that if Congress does not enact the committee's recommendations, cuts of $1.2 trillion will be implemented over the same time period. The reductions would mainly affect outlays for civilian discretionary spending, defense, and Medicare. We understand that this fall-back mechanism is designed to encourage Congress to embrace a more balanced mix of expenditure savings, as the committee might recommend.

We note that in a letter to Congress on Aug. 1, 2011, the Congressional Budget Office (CBO) estimated total budgetary savings under the act to be at least $2.1 trillion over the next 10 years relative to its baseline assumptions. In updating our own fiscal projections, with certain modifications outlined below, we have relied on the CBO's latest "Alternate Fiscal Scenario" of June 2011, updated to include the CBO assumptions contained in its Aug. 1 letter to Congress. In general, the CBO's "Alternate Fiscal Scenario" assumes a continuation of recent Congressional action overriding existing law.

We view the act's measures as a step toward fiscal consolidation. However, this is within the framework of a legislative mechanism that leaves open the details of what is finally agreed to until the end of 2011, and Congress and the Administration could modify any agreement in the future. Even assuming that at least $2.1 trillion of the spending reductions the act envisages are implemented, we maintain our view that the U.S. net general government debt burden (all levels of government combined, excluding liquid financial assets) will likely continue to grow.

Under our revised base case fiscal scenario--which we consider to be consistent with a 'AA+' long-term rating and a negative outlook--we now project that net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act's revised policy settings.

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.

Our revised upside scenario--which, other things being equal, we view as consistent with the outlook on the 'AA+' long-term rating being revised to stable--retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021.

Our revised downside scenario--which, other things being equal, we view as being consistent with a possible further downgrade to a 'AA' long-term rating--features less-favorable macroeconomic assumptions, as outlined below and also assumes that the second round of spending cuts (at least $1.2 trillion) that the act calls for does not occur. This scenario also assumes somewhat higher nominal interest rates for U.S. Treasuries.

We still believe that the role of the U.S. dollar as the key reserve currency confers a government funding advantage, one that could change only slowly over time, and that Fed policy might lean toward continued loose monetary policy at a time of fiscal tightening.

Nonetheless, it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021. Our revised scenarios also take into account the significant negative revisions to historical GDP data that the Bureau of Economic Analysis announced on July 29.

From our perspective, the effect of these revisions underscores two related points when evaluating the likely debt trajectory of the U.S. government. First, the revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Consequently, the debt burden is slightly higher. Second, the revised data highlight the sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions. We believe the sluggish pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a persistent drag on demand.

As a result, our downside case scenario assumes relatively modest real trend GDP growth of 2.5% and inflation of near 1.5% annually going forward.

When comparing the U.S. to sovereigns with 'AAA' long-term ratings that we view as relevant peers--Canada, France, Germany, and the U.K.--we also observe, based on our base case scenarios for each, that the trajectory of the U.S.'s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.

Standard & Poor's transfer T&C assessment of the U.S. remains 'AAA'. Our T&C assessment reflects our view of the likelihood of the sovereign restricting other public and private issuers' access to foreign exchange needed to meet debt service. Although in our view the credit standing of the U.S. government has deteriorated modestly, we see little indication that official interference of this kind is entering onto the policy agenda of either Congress or the Administration. Consequently, we continue to view this risk as being highly remote.

Outlook

The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction--independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners--lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government's debt dynamics, the long-term rating could stabilize at 'AA+'.

On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.

The U.S. Debt Ceiling Standoff: How It Could Affect Structured Finance

On July 15, 2011, Standard & Poor's placed its ratings for certain structured finance transactions on CreditWatch negative due to their exposure to the sovereign rating on the United States of America. The resolution of these CreditWatch placements will depend, in part, on whether the U.S. sovereign rating changes and, if so, the degree to which each structured finance transaction's payments might, in our opinion, be affected by the change.
Gary Kochubka, senior director in Standard & Poor' ABS Ratings group, and Ted Burbage, head of U.S. Investor Relations, discuss the impact of three hypothetical scenarios following the possible lowering of the U.S. sovereign rating.

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. 

President's Birthday Bash & Stampede at Wall Street

Bear Attack on Wall Street

The S& P 500 Reached 1205 the threshold that breached after QE 2 announcement, in late 2010. Expectedly, the derivative markets sprang back to 1222. Well, on the back of bear profit taking, As no one had expected such a fall.
What spooked market players ? Was it Indigestion of Worst economic data and News flow ?
Yea, the US Debt Debate brought out, so much, that whole world became disgusted. The Politicians were never ' Good Bed Fellows' and hardly, ever for economic recovery. The Last, 3 years honeymoon ending in sorrow.

The Man spooking Markets

Well, Is this a market that is worth entering ? Yes, it does for a nimble footed and supple foxy trader. And, with a strict stop loss.

Tomorrows, job Numbers is going to be an Insipid event..?

Its wager. A hard wager. Play like a bull and make some losses good.

The Best Bottom line is unusual than ever, One Year Treasury Yields sink in Negative zone..?

factually, impossible. In sense, if I borrow, the lender shall pay me a premium..? Not possible.

It shows no one wants to borrow, as Interest rates might Go Up and Invested amount would not give me any thing.  The Investment scene is Ugly and may get Uglier.

The Call on the verge from me was to stand aside and play the short term diection.

But, this is the Last Phase, of the cycle of Recession

Value gets desecrated and Everything will Lose Value,
Before there is a Reset

Return of 2007 Bear Sterns Ghost in July 2011

S&P 500 Corporations Are Reporting Solid Second-Quarter Earnings Growth; Earnings Per Share Reach Record Of $25

At the start of 2011, the Valuation and Risk Strategies (VRS) research team referred to the recently reported record-setting $380.9 billion in December retail sales as evidence that "a large portion of the U.S. economy has now normalized and put the 2008 credit crisis behind it.

Six months later, we are now witnessing yet another historic milepost of the recovery. Second-quarter 2011 S&P 500 corporate earnings are currently tracking at $25.12 per share (17.6% growth), representing a new record for quarterly earnings that eclipses the prior high-water mark of $24.17 recorded in the second quarter of 2007, according to Capital IQ data.

From our perspective, the symmetry here is nearly perfect; in early July 2007, we first started hearing talk of problems at a Bear Stearns sub-prime RMBS hedge fund, which, in hindsight, turned out to be the very early incubation days of the credit crunch. On the fourth anniversary of the start of the credit crunch, after U.S. GDP bottomed out in the second quarter of 2009, S&P 500 profitability has now fully recovered from the credit crisis on the heels of the recovery in retail sales recorded at the start of the year.

VRS Research is impressed with the way that the second-quarter earnings season is unfolding. This past quarter's headwinds included historic flooding and tornado activity in the U.S. Midwest, negative supply-chain repercussions from the March disaster in Japan, a spike in global uncertainty due to simmering fiscal problems in peripheral Europe and the U.S., and a general sense of economic malaise following recent sub-par U.S. employment growth. These economic headwinds prompted stock analysts to reduce consensus second-quarter expected earnings growth to as low as 12% on July 14, from as high as 15.2% on May 4.

Reported earnings, however, have been quite strong so far. Second-quarter S&P 500 earnings are currently growing at 17.6% (60% reported), with 72% of companies beating consensus expectations, while 19% have missed the estimates. Companies on average are reporting earnings that are 6.5% higher than what was expected at the time each company announced earnings. As economic recovery moves forward, we continue to believe that top-line revenue growth remains the main contributor to sustained double-digit earnings growth. 

Fact sheet: President Obama declares the " Debt Deal" -Video

Fact Sheet: Bipartisan Debt Deal: A Win for the Economy and Budget Discipline

Bipartisan Debt Deal: A Win for the Economy and Budget Discipline

• Removes the cloud of uncertainty over our economy at this critical time, by ensuring that no one will be able to use the threat of the nation’s first default now, or in only a few months, for political gain;
• Locks in a down payment on significant deficit reduction, with savings from both domestic and Pentagon spending, and is designed to protect crucial investments like aid for college students;
• Establishes a bipartisan process to seek a balanced approach to larger deficit reduction through entitlement and tax reform;
• Deploys an enforcement mechanism that gives all sides an incentive to reach bipartisan compromise on historic deficit reduction, while protecting Social Security, Medicare beneficiaries and low-income programs;
• Stays true to the President’s commitment to shared sacrifice by preventing the middle class, seniors and those who are most vulnerable from shouldering the burden of deficit reduction. The President did not agree to any entitlement reforms outside of the context of a bipartisan committee process where tax reform will be on the table and the President will insist on shared sacrifice from the most well-off and those with the most indefensible tax breaks.

Mechanics of the Debt Deal

• Immediately enacted 10-year discretionary spending caps generating nearly $1 trillion in deficit reduction; balanced between defense and non-defense spending.
• President authorized to increase the debt limit by at least $2.1 trillion, eliminating the need for further increases until 2013.
• Bipartisan committee process tasked with identifying an additional $1.5 trillion in deficit reduction, including from entitlement and tax reform. Committee is required to report legislation by November 23, 2011, which receives fast-track protections. Congress is required to vote on Committee recommendations by December 23, 2011.
• Enforcement mechanism established to force all parties – Republican and Democrat – to agree to balanced deficit reduction. If Committee fails, enforcement mechanism will trigger spending reductions beginning in 2013 – split 50/50 between domestic and defense spending. Enforcement protects Social Security, Medicare beneficiaries, and low-income programs from any cuts.

1. REMOVING UNCERTAINTY TO SUPPORT THE AMERICAN ECONOMY

• Deal Removes Cloud of Uncertainty Until 2013, Eliminating Key Headwind on the Economy: Independent analysts, economists, and ratings agencies have all made clear that a short-term debt limit increase would create unacceptable economic uncertainty by risking default again within only a matter of months and as S&P stated, increase the chance of a downgrade. By ensuring a debt limit increase of at least $2.1 trillion, this deal removes the specter of default, providing important certainty to our economy at a fragile moment.
• Mechanism to Ensure Further Deficit Reduction is Designed to Phase-In Beginning in 2013 to Avoid Harming the Recovery: The deal includes a mechanism to ensure additional deficit reduction, consistent with the economic recovery. The enforcement mechanism would not be made effective until 2013, avoiding any immediate contraction that could harm the recovery. And savings from the down payment will be enacted over 10 years, consistent with supporting the economic recovery.

2. A DOWNPAYMENT ON DEFICIT REDUCTION BY LOCKING IN HISTORIC SPENDING DISCIPLINE – BALANCED BETWEEN DOMESTIC AND PENTAGON SPENDING

• More than $900 Billion in Savings over 10 Years By Capping Discretionary Spending: The deal includes caps on discretionary spending that will produce more than $900 billion in savings over the next 10 years compared to the CBO March baseline, even as it protects core investments from deep and economically damaging cuts.
• Includes Savings of $350 Billion from the Base Defense Budget – the First Defense Cut Since the 1990s: The deal puts us on track to cut $350 billion from the defense budget over 10 years. These reductions will be implemented based on the outcome of a review of our missions, roles, and capabilities that will reflect the President’s commitment to protecting our national security.
• Reduces Domestic Discretionary Spending to the Lowest Level Since Eisenhower: These discretionary caps will put us on track to reduce non-defense discretionary spending to its lowest level since Dwight Eisenhower was President.
• Includes Funding to Protect the President’s Historic Investment in Pell Grants: Since taking office, the President has increased the maximum Pell award by $819 to a maximum award $5,550, helping over 9 million students pay for college tuition bills. The deal provides specific protection in the discretionary budget to ensure that the there will be sufficient funding for the President’s historic investment in Pell Grants without undermining other critical investments.

3. ESTABLISHING A BIPARTISAN PROCESS TO ACHIEVE $1.5 TRILLION IN ADDITIONAL BALANCED DEFICIT REDUCTION BY THE END OF 2011

• The Deal Locks in a Process to Enact $1.5 Trillion in Additional Deficit Reduction Through a Bipartisan, Bicameral Congressional Committee: The deal creates a bipartisan, bicameral Congressional Committee that is charged with enacting $1.5 trillion in additional deficit reduction by the end of the year. This Committee will work without the looming specter of default, ensuring time to carefully consider essential reforms without the disruption and brinksmanship of the past few months.
• This Committee is Empowered Beyond Previous Bipartisan Attempts at Deficit Reduction: Any recommendation of the Committee would be given fast-track privilege in the House and Senate, assuring it of an up or down vote and preventing some from using procedural gimmicks to block action.
• To Meet This Target, the Committee Will Consider Responsible Entitlement and Tax Reform. This means putting all the priorities of both parties on the table – including both entitlement reform and revenue-raising tax reform.

4. A STRONG ENFORCEMENT MECHANISM TO MAKE ALL SIDES COME TOGETHER

• The Deal Includes An Automatic Sequester to Ensure That At Least $1.2 Trillion in Deficit Reduction Is Achieved By 2013 Beyond the Discretionary Caps: The deal includes an automatic sequester on certain spending programs to ensure that—between the Committee and the trigger—we at least put in place an additional $1.2 trillion in deficit reduction by 2013.
• Consistent With Past Practice, Sequester Would Be Divided Equally Between Defense and Non-Defense Programs and Exempt Social Security, Medicaid, and Low-Income Programs: Consistent with the bipartisan precedents established in the 1980s and 1990s, the sequester would be divided equally between defense and non-defense program, and it would exempt Social Security, Medicaid, unemployment insurance, programs for low-income families, and civilian and military retirement. Likewise, any cuts to Medicare would be capped and limited to the provider side.
• Sequester Would Provide a Strong Incentive for Both Sides to Come to the Table: If the fiscal committee took no action, the deal would automatically add nearly $500 billion in defense cuts on top of cuts already made, and, at the same time, it would cut critical programs like infrastructure or education. That outcome would be unacceptable to many Republicans and Democrats alike – creating pressure for a bipartisan agreement without requiring the threat of a default with unthinkable consequences for our economy.

5. A BALANCED DEAL CONSISTENT WITH THE PRESIDENT’S COMMITMENT TO SHARED SACRIFICE

US (Im)Balanced budget: Political Strangle and Economic Suffocation

The US Debt raise and Balanced Budget is likely to be Political Strangle Hold on the Washington and is expected to remain  an financial Traction and Suffocation to the ailing Economy. The Debt Deal prescriptions may starve the Economy and Inject a traction, which is Likely to act more of Noose, than a rope.

Alan Greenspan, in his recent interviews had rightly hinted the impasse and predicated a vary Late Awakening by political class of the impending reality. Washington news is churning all sorts of formulations.
The victory to neither and both republicans, democrats hints that,
         Bush Tax Cuts not extended.
1) The Bush Tax Cuts will vanish in thin air, replaced by a ' Cumbersome formula ' paving a larger   opaqueness. The Back Door Taxing will impinge the Corporates. 
                                                                                          The Shallow Expenditure Cuts:                                                                                                                                                                                                          

2) The Governmental expenditure will be Trimmed by an extent, which may appear too little, and unsustainable. The wafer thin margin of errors and provisioning for extremities will endure to uncertainty towards real fulcrum of the deal squabble.
         Absence of Long Term Plan                                                                                                                             
3)  The Lack of Long Term Plan and Uncertainty will invite the Rating Agencies to recur the down grading of US Sovereign Debt Sooner, than expected.
        Inverted yield Curve:
4)  The Rise in Borrowing shall, hence forth will accompanied by ' Rising Yields'. The Short Term End of the Yield curve may Rise, faster than the Long Term. This will make the 'Yield Curve' Inverted for the Medium Term.
                               Balancing Of Budget is delayed :
5)  The ' Unresolved Remainder Budget' will be maintained by the US Government, for now and shall nag, the Investors like 'a wagging tail'. The State Budgets discrepancies may surface
                               Continued Political Bickering.
6)  The redundant imbalance now is likely to taken to the each state and Common Citizens. This unresolved issues may be 'political menu' for the upcoming Election.  US will be seeing much too, turbulent times than is being seen, today and Polarisation may spurt in the coming months
                               Wall Street Response
     However , Wall Street and International Equity Bourses likely to celebrate the ' Relief Rally' for lifting the immediate traction and the ' Oil And Gas Sector' is likely to have better days. The Unwinding Trade in USD Index will ensue hereafter. The Spike Volatility shall be higher with VIX nearing 30/38 range
            Investors: remain on Wait/ Watch.
     But, Investors shall be better off, If they, remain Side ways and Deal with Utmost Caution, as ' Risk' is not Priced in the Equities and Bond Markets. And, wait for Opportune time to enter.