How to Invest on the S&P Downgrade of U.S. Debt

BOSTON ( TheStreet) -- Standard & Poor's move to lower the company's outlook on the long-term rating of the U.S. sovereign debt to negative may have caught investors by surprise, but Michael Pento, senior economist with Euro Pacific Capital, has been making this case for years.

"It's not a surprise to me," Pento says of Standard & Poor's revision. "It's clearly late. But at least S&P is now waking up to the fact that the American sovereign debt picture is unsustainable and eventually we have to default on our debt in some form."

Just how late is S&P's revision to its outlook of U.S. debt?

"I heard that the ratings agencies just downgraded the Titanic's chances of crossing the Atlantic," Pento jokes.

Being late to the game is not a new criticism of credit ratings agencies like Standard & Poor's, Moody's and Fitch Ratings. They have been hammered for their role in the financial crisis, with critics arguing that the agencies were negligent for continuing to rate securities of subprime-related loans highly even as the market deteriorated. Once again, they are being lambasted for their inability to be forward looking.

In the report released Monday, S&P analysts write that there is a "material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013."

If an agreement is not reached and meaningful implementation is not begun by then, S&P analyst Nikola Swann writes, the U.S. fiscal profile would be rendered "meaningfully weaker than that of peer 'AAA' sovereigns."

"If nothing else, this puts a stamp on the problems in Washington with the budget disagreements and continued spending," says Paul Nolte, managing director with Chicago-based Dearborn Partners. "It's not healthy for the long term. A lot of people say that we'll just raise the debt limit like we have the last 39 times. This report puts the problems of continued big deficits front and center in front of everyone's faces."

If being late weren't maddening enough to critics, S&P's Swann offers an irritating 1-in-3 likelihood that the firm could lower the long-term rating on the U.S. within two years.

"I don't know how you handicap something as complex as the U.S. government," says Nolte. "Is it any easier to handicap Brazil or Greece? I don't necessarily agree with it."

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