Standard & Poor’s (S&P) on Monday revised its outlook for the US sovereign credit rating from AAA/A-1+ to AAA/A-1-. The new outlook indicates that the ratings agency believes there’s a one-in-three chance that the US’ credit rating will be downgraded in the next two years. Given that the US is considered the paradigm of a AAA credit, the downgrade was market shaking news.

Investors have already gleaned the true message of this downgrade, though it continues to elude the talking heads on television. America’s problem isn’t its ability to pay its debt, but rather a lack of political will to honor this debt.

The US dollar is still the de facto global reserve currency, regardless of calls from other nations to establish a new reserve currency such as the International Monetary Fund’s Special Drawing Rights. The US government still has the ability to fire up the printing presses in order to honor its debts–even if this move would be ill advised. The bottom line is that the US could pay off all holders of US Treasury debt, despite our country’s $1.5 trillion deficit on top of $9 trillion in debt.

The question now is whether there’s the political will to meet our nation’s obligations. We’ve recently witnessed a fairly skilled game of political brinksmanship over the US budget. Our lawmakers worked out a deal, literally in the eleventh hour, to prevent a government shut down–an event that would have constituted a technical default.  But that agreement does almost nothing to address our country’s intermediate- and long-term budgetary challenges, and shaves only about 1 percent off the US deficit. Our politicians are now squabbling over whether to increase the nation’s debt ceiling–reinforcing the fact that our debt problem is essentially political in nature.

The chattering classes have focused on the US’ ability to pay off its debts, but the bond market understands that the real problem is political. Political problems are inevitably solved, either by consensus or by the markets.

Although the S&P downgrade triggered a sell-off in Treasuries in early trading, government bonds saw a strong rally later in the day; many investors were happy to pick up additional yield. And investors wouldn’t take the long side of that trade if they didn’t see light at the end of the tunnel. Investors also recognize that the US debt crisis is fundamentally different from the sovereign debt woes that plague Europe. Across the pond, there’s a legitimate concern over European nations’ ability to pay off their debt.

Consequently, I don’t recommend going short Treasuries at this point, even though a few exchange-traded funds (ETF) would allow one to do so. Short-Treasury ETFs such as Proshares Short 7-10 Year Treasury feature a daily reset to the fund’s leverage. This makes it unwise for investors to keep open positions in these offerings for more than a day. The transaction costs in these ETFs will diminish gains, making them unsuitable for all but large institutional players.

Instead, consider local currency bond funds such as Market Vectors Emerging Markets Local Currency Bond (NYSE: EMLC). Although the dollar has strengthened of late, lingering worries over US debt will keep the greenback on the decline–a trend that’s played out for the past decade. Bonds issued by countries with stronger balance sheets and more sensible monetary policies will make gains and enjoy a helpful tailwind from stronger currencies.

What’s New

Global X Waste Management (NYSE: WSTE) has caught my eye since its launch last week.

As global incomes and standards of living continue to rise, so will consumption. Virtually everything you buy comes in a package that will eventually have to be disposed of; waste is the inevitable byproduct of rising wealth and consumption.

Global X Waste Management holds equity positions in 29 companies in the waste management industry. The portfolio’s exposure is fairly evenly divided between businesses in non-hazardous waste, hazardous waste and recycling outfits.

The waste management business is very sensitive to shifts in the economy. That’s because hazardous waste volumes are closely tied to industrial activity, while the volume of non-hazardous waste is closely related to consumer activity. When the former picks up, the latter soon follows. Meanwhile, the recycling business correlates to consumption of commodities. As commodity prices rise, recycling becomes increasingly economical compared to the cost of digging up more raw materials.

With a 0.65 percent annual expense ratio, this fund is an attractive way to play on garbage.