ONE YEAR AFTER THE U.S. LOSES ITS AAA RATING

Last year on August 5th, the U.S. lost its AAA rating. This was something that most people globally never thought was possible. S&P lowered its long-term sovereign rating of the United States at AA+ from AAA, citing uncertainties around the debt-ceiling debat and a ballooning deficit. Being oneof the "big three" rating agencies together with Moody's and Fitch, S&P has so far maintained a negative outlook. For many investment portfolios, the weighted average rating of the big three agencies is the most important factor when making investment decisions, so there was no forced liquidation and many market paricipants still think that the downgrade did more psychological than technical damage. Looking at some individual market metrics, the effect of the downgrade seems to have faded one year later. The CBOE Volatility Index or VIX, on common measure of equity risk also know as the "fear" index stood at elevated levels of 25 one day before the downgrade. The yield on the 10 year U.S. Treasury was 2.47 percent on August 4, 2011, and now stands at 1.63 percent, almost a full percentage point lower. So despite the lost credibility, the United States now pays a lower risk premium to fund itself than before the downgrade. Conventional wisdon says that Treasury yields are lower strictly because of debt monetization. This is the cumulative result of QE1, QE2 and operation twist. Banks borrow at zero from the Fed and buy Treasuries. This generates a meager return for the banks and artifical demand for Treasuries. With the Fed being already the largest creditor of the United States, however, another round of dangerous printing in the form of QE3 could trigger another downgrade from a less known rating agency, Egan Jones. Egan Jones is an agency that does not accept payment by the entities it reviews. It generates its revenues by fee-paying clients in the financial industry that use its research to make investment decisions. Egan Jones downgraded the U.S. in April to AA seeing no improvements in the underlying problems. The budget deficit is estimated to be "close to" 10 percent by the end of 2012. They also see a structural reduction in flexibility as the country has crossed the 100 percent debt to GDP ratio along with the structural unemployment, reckless monetary policy and an economy that is growing at a very slow speed. Despite showing positive market metrics, there is more to the story than meets the eye. In a recent statement, S&P siad that there are risks that could build to the point of leading S&P to lower the AA+ long-term rating by 2012. The other two big rating agencies have also guided to a timeframe of 2013-2014 to reassess their ratings.