“Standard and Poor’s downgrade of American sovereign debt from the highest, triple-A rating may be the silliest pretext for a stock market crash in world history. America is the only big industrial country in the world that will have more taxpayers rather than fewer when a newly-issued 30-year bond matures.
The bubble that has popped here is not American government debt, but the overstretched and overpromised hedge fund industry. It’s impossible to tell how long the liquidation will continue. But the stock market today does not run off fumes as in the dot-com days of the 1990s, nor off the phony profits of ultra-levered financial companies as in the 2000s. Corporate America is flush with cash, financially sound, and making better money than ever before (Italics mine).
For that reason, I consider this a liquidity event like 1987 rather than a true crisis like 2008 (with a $6 trillion shock to household balance sheets and the evaporation of bank equity). It’s not the end of the world. It’s just the end of the hedge fund industry. ”