Why U.S. AAA Rating Rumors Are A Lot Of Hot Air

(MoneyWatch) 
In times of market strength, it's often noted what gross delusions of grandeur we suffer from as everyone chases the next "hot" tip, looking everywhere for any arbitrary sign of further growth. When an economy hits that point, it's usually time to get out and go away.

What's less well observed -- but equally true -- is that in times of economic crisis the reverse also applies.

When ratings agency Standard & Poor's cut its credit-rating outlook on the U.K. to "negative" Thursday, investors were quick to bolt out the door, sending stocks sliding in London by 2.8%. Shortly after, the U.S. Labor department said that jobless claims fell 12,000, to 631,000, which was a little more than forecast. Again, investors panicked.

But that wasn't all. Further gloomy speculation then ensued that the U.S. would "lose" its triple A credit status after Bill Gross, co-chief investment officer of bond giant Pacific Investment Management told Reuter's Jennifer Ablan via e-mail that the country is "going the way of the U.K. -- losing AAA rating which affects all financial assets and the dollar."

That was enough to send the broker notes into an orgy of pessimism by the end of the week.

But let's recap for a second. U.S. jobless claims went down, while the S&P, which did a somewhat less than stellar job of rating mortgage-backed securities less than 12 months ago, issued a statement saying that this time, it's downgrading an entire country's credit outlook. Then, just to top it all off, an investment manager sent an e-mail to a journalist speculating that the same disreputable credit ratings agency might do the same for U.S. creditworthiness.

That's almost as bad as, "Never mind that latest blip of data which shows that online shopping trends are falling. I know a guy who has a neighbor who's starting an online supermarket that his best friend who's a top Goldman's guy says will make the IPO debut of the century."

Recall how differently that scenario turned out from expectations at the beginning of the millennium. The process is exactly the same, be it an economic upswing or a downturn: at the end of the day, hype is never a substitute for the facts.

Felix Salmon chimes in to the S&P decision:

S&P putting the UK on watch for a possible downgrade is a decision prompted by economic fundamentals. Any such move with the US, by contrast, would be entirely political, and in any event would say much more about S&P than it did about Treasuries.

The recently downcast chatter has been most prominent in the talk of gold becoming a preferable reserve currency, which, some claim, could send it whizzing up to $9000 an ounce as the value everything else plummets.

To summarize, the pessimism over the global economy now seems to have surpassed the reality of its resilience to external shocks. That's a sure sign that things are finally on the turn.

Related Reading at BNET Finance:

• A Gold Standard Wouldn't Work Today