Tuesday, 9 August 2011

Psychology of a panic market

Standard & Poor's have just downgraded the US credit rating a notch from AAA to AA+.  This is the first time ever that the USA has not had a perfect credit rating.  It means that Standard & Poor's, a financial services company, feel that the USA cannot pay back it's debt as easily as before.  In short, the US is not the safe guarantee that they used to be, in the view of Standard & Poor's.

In reaction to this, stock markets proceeded to free-fall.   The Dow Jones fell by over 5% in one day - that is carnage.  Imagine having a $100,000 portfolio losing $5,000 in just one day.  President Obama was quick to make a 10 minute national address assuring the world that America is still a AAA country and that will not change no matter what "some rating agency" may think.  America had not lost its ability to pay its debt he said, but rather it was the lack of political will and cohesion between Republicans and Democrats that led to the downgrade.  Simply put, this means the US can default on its debt even if they have enough cash to pay it, because while a payment deadline looms, congress will be bickering over what action to take.

AAA or AA+, investors are not happy and are pulling their money from stocks and going into gold.  I for one think that America would still be able to pay its debt.  I mean, even with a AA+ rating they are still rated above China.  Rest assured there are many who share my belief that there's no need to panic, yet.  But I still pulled my money out of all stocks except gold companies, as soon as news of the credit rating downgrade was announced.  Why?  Because I fear that other investors are going to panic, and they did.  I could lose a whole lot of money if I don't act promptly.  It doesn't matter what I think or even what the America's true ability to pay its debt is.  The only thing that matters is what investors perceive the truth to be.  And at the moment they perceive this to be the beginning of a disaster.  Italy, Spain and Portugal are also in dire straits, so that doesn't help.  Stock prices are being driven down by the panic and I need to preserve my capital.  Like a panicked investor, I offloaded my stocks even though I didn't believe there was a rational reason to.  My fellow investors dictated that I do so.

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