S&P Under Attack from the Government

Posted by Ray on August 8, 2011 under Main | Be the First to Comment

I had made a prediction last year, found HERE, that US Treasuries would be put on negative watch by Fitch and downgraded to junk by China. Well, I was wrong as it was S&P who made the call and actually did downgrade the US to AA+ which is still a joke as the government will never be able to actually repay much of the $14T it has outstanding without just printing money, which IS a form of default. China is now saber rattling about the US dollar again, but this time they are serious, I think at least, asking for a new reserve currency and I think they will get what they want as other countries have raised the same concerns.

The US deserved to be downgraded and we should be downgraded much further than AA+ as we will not get serious about debt reduction. To prove my point all we have to do is look at how the debate is structured. The politicians are all talking about annual deficits and NOT the outstanding debt load. They do all sorts of double talk to make sure the average person only believes we have a trillion or o in outstanding debt, but that trillion is just the annual deficit and no one talks about the big number of $14T in outstanding current liabilities. S&P gets it and that is why they are the first one to downgrade the US.

When the downgrade happened the Treasury Department acted quickly calling the move unjustified, political, terrible lapse of judgment, S&P made a mistake, and these are the same people who rated junk bonds AAA to begin with. While it is easy to criticize S&P for their prior actions, but relative to its sovereign debt ratings those arguments hold no water and anyone with a stitch of unbiased rationale realizes that the US is indeed in big trouble and we do not deserve a AAA rating. The worst part about this downgrade is the fact that the government is now baring down on S&P about this downgrade.

It was just announced that the Senate Banking Committee will be looking into the downgrade. While we do not know if hearings will happen or not the person close to the matter did say all options are on the table. I was under the impression that Congress wanted independent ratings agencies along with an independent Federal Reserve. Silly me I guess as the minute a ratings agency does the right thing they try to crush it with Senate investigations, but the Federal Reserve can monetize trillions in US debt without Congress blinking an eye, unreal.

What Congress is saying is be independent as long as you do what we say and want and if you decide to think for yourself, well, we will hunt you down and skin you alive. The government is acting very much like the old Soviet Union and is sending a message, not matter what we do keep us rated AAA. How can a ratings agency offer an independent review of a security if the government demands that it gets what it wants regardless of what the facts are? It is insane to think that the ratings agencies will remain independent if Congress has investigations if the US is downgraded. Frankly, this is extortion, blackmail or a combination of the two since the government is the one who issues S&P with its ratings license. Will S&P lose its license over this? I do not know, but it is possible and shameful if that is what happens.

As an American you should be angry over the downgrade, but not at S&P. You should be angry at the people who rubberstamps every bill that comes along wasting billions of dollars. You should be angry at their inability to work with each other and address the seriously obvious structural issues that will consume immense amounts of capital in the coming years. You should be angry that the Senate wants to investigate S&P while saying other quasi government agencies are left alone even though they are part of the problem. You should be angry that Alan Greenspan, Mishkin, Bernanke and every other clown out there says the US will never default because we can print our own money to pay the debt, devaluation IS a default.

You should NOT be mad at S&P and you should demand that Congress work on real problems because their lack of dealing with those problems is exactly why S&P downgraded them to begin with. We are not showing the world that we are capable of fixing any real problems. What we are showing the world is that if we do not get our way we will simply create problems were none exists and threaten the “trouble maker” with depriving them of their livelihood or by throwing them in jail. Way to go America.

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The US and its AAA Rating

Posted by Ray on October 22, 2009 under Main | Be the First to Comment

I have talked about this before, but figured I would bring it up again as it is making headlines that the US may lose its coveted AAA rating. Does it really matter if the US loses this rating or not? It does from an ego point of view, but that is about it since it is highly unlikely that the US will default on its debt. Instead the US will more than likely simply inflate our way out of the mess we are in rather than actually default, but that would still count as a “default” to a certain degree.

What you need to know about rating’s agencies and how they rate sovereign debt is that the game is rigged. We know these agencies did a bad job with the mortgage debt and other private debt in the recent past, but Green Light Capital wrote a great piece on how Moody’s in particular rates sovereign national debt. Basically, the firm only looks about a year out to see how these countries can finance themselves and they do not tax demographics or tax policy into account yet they are predicting some 5 to 7 years out. It was a very interesting read and I will post the article below. Essentially, Moody’s is telling everyone that there is nothing wrong until there is something wrong and then they downgrade the paper, sound familiar?

I could also point to Executive Life which carried AAA ratings right up until the day it filed for bankruptcy, but I would be dating myself. This is what ratings agencies do, they have a CYA policy and then try to argue that their service is covered under the 1st Amendment, when clients pay for it which is not how the real world works. Anyhow, getting back on point, would the US lose its AAA rating? More than likely we will, but not because of default, but because of devaluation of the currency.

Investors will always get back the face value of the debt they buy from the treasury, I would guarantee that, but the US never guarantees the value of said dollars. Hell, Zimbabwe guarantees you will get back the face value of their debt, but, well you get the point. In a nut shell, even if get taken down to a AA rating it will not even impact our interest rates since we set them. Until we actually have a real crisis, meaning a currency crisis or consistent failed treasury auctions which would force higher interest rates – see Argentina – then the borrowing costs will remain wherever we set them.

Essentially, until the market says otherwise we still call the shots, but I will be the first to tell you that we cannot and will not be able to call the shots forever. With the total public debt, including intra-government debt, at $11.9T, according to treasurydirect.gov, which is 83% of 2008 GDP, we are getting up to a level when people are going to question are ability to pay them back. I mean, it’s not like we were really going to pay them back to begin with, but at least we gave them the illusion of repayment with debt-to-GDP well below 100%.

With the administration and CBO, I never give estimates much weight because they are always wrong as in way too low, calling for trillion dollar deficits for the next 10 years and that is if we have an actual recovery I think we need to think worst case scenario. If we do not recover in the next year or two then double those numbers and then we are talking reality or close to it. That is when the market will tell us that we know you are full of it and will demand higher returns on their loans to us. Basically, a credit rating means nothing on sovereign debt as it is still market driven and a great example is Japan who lost most of its AAA ratings already.

My big fear is and I think we are far away from this unless something funky happens in the currency market is a failure in the USD. However, in my opinion I think we would need to see treasury auction failures happen well before we see a currency failure occur and based on demand right now that simply is not going to happen. China, Russia and India can talk all they want, we are listening, but they are still buying and that is all that matters right now. Yes, we need to get our act together, I am not denying that, but it is not as severe as many are saying, unless the DXY slips below the 71 level then I will be a bit worried and you should be too.

21311124-Einhorn-Vic-2009-Speech

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