The S&P Downgrade: A Lesson in Analysis

As I write this, stock markets around the world continue their recent and very sharp and painful slide, this time motivated by the downgrading of US debt by S&P last Friday. Regular readers of this blog may not have a big interest in matters of global finance, but such is vital to the success of our business and personal lives. Someone needs to provide the money to do what we do, and the psychology surrounding sharp losses, temporary (depending, of course, on one’s timeframe) though they may be, can have a major impact on our own income and the availability of funds for that next big wireless purchase. So it’s worth paying at least a little attention to this situation, and there’s also a powerful lesson in analysis here.

I’m an analyst. As such, I take various elements of information and synthesize these into a prediction as to what will happen in the future. That’s precisely what S&P has done, and it’s hard to argue with their reasoning. S&P is a business that serves a customer and they are just doing their job. And their analysis, IMHO, is just fine. I don’t have a detailed knowledge of the bond markets, so I rely on their expertise here.

But keep in mind that S&P is only rendering an opinion, based on their own analytical methodology. Most people, I think, ignored the reasoning and jumped to the conclusion here, reacting emotionally, and that’s why we’re seeing so much money evaporate as I write this (the stock market is not, after all, a bastion of reason and thought; it’s purely emotional, especially over the short term). And S&P took exactly the right approach in making their pronouncement (and here’s the lesson) – they showed their work. They didn’t just announce the result that’s stirring emotions globally; they also produced the detailed reasoning behind it. While this is primarily the work of three people, the brand name of their employer carries significant weight. But no one is perfect – S&P really blew it with their ratings of mortgage-back securities, a lynchpin in the start of the current economic mess. Information is sometimes not exactly such; it’s up to us to consider the reasoning, not just the conclusions, and take appropriate action – in this case, or any other involving analysis.

As I an aside, I completely agree with both the reasoning and the conclusions of the S&P report and the consequential ratings action. The financial situation of the US government is poor and getting worse, and is the result of fiscal policy more aligned with the re-election of politicians than the long-term success of the nation. The remedy, and here’s my analysis, is term limits, the elimination of pensions for the legislative branch (they can have a 401(k) like the rest of us, however), and a return to limited Constitutional principles, thus empowering the private sector to do what it does, namely serve a customer in a competitive market. Government is trying to accomplish goals that it simply cannot achieve, and we’ve wasted vast sums of money in the process. Big debt plus limited global growth for the foreseeable future, and S&P is right on the money, so to speak. Just my $.02.

The production of sound analytical reasoning is essential in finance, technology, and just about every other field of human endeavor. Blame the messenger if you will (I shudder to think what all of this has done to my 401(k)), but well-reasoned independent analysis, whether one agrees with the conclusions and reasoning or not, is essential if we are ever to understand reality and take whatever actions are consequentially appropriate. But don’t blame the messenger, especially when they’ve done their homework.

Returning to wireless and mobile, I will tomorrow publish my own outrageous analysis piece. I hope that the lessons I outlined above will mitigate any knee-jerk responses.