Not only did it catch the Obama Administration by complete surprise, but the Treasury Secretary, Timothy Geithner, lashed out at the actions taken to remove the symbolic top tier rating that has stood the test of time since 1941 ...
Standard & Poor’s went on to defend its decision, citing growing concerns about the government’s budget deficits and rising debt burden. They also noted that the lack of political confidence and the polarizing environment in Washington are significant barriers to finding a substantial solution to the mounting problem.
Now, I’m no Congressional budget accounting expert by any stretch of the imagination. But when I look at the trillion dollar deficits being booked over the last several years, and the projections going forward that continue this trend, the math seems pretty clear to me -- it’s fiscally irresponsible and recklessly unsustainable.
The 2011 estimate for GDP should come in around $14.5 trillion, and with our national debt at nearly $14.6 trillion and climbing (should end up with a $1.3 trillion deficit this year alone!), the debt will now be larger than the annual output of the entire economy.
The chart below is complete through fiscal year 2010, and shows the prior 10 year history of debt to GDP. When this chart is updated through fiscal year 2011 (ending September 30), the ratio of total debt as a % of GDP will indeed pierce 100%.
In reality, the downgrade should have no real immediate impact on the ability of the U.S. to honor its debts, and U.S. Treasuries are no less safe than they were last week. In fact, from the recent sell-off and market turmoil, investors have been buying them up with great vigor, as it continues to be the most liquid haven to park reserves.
However, as the U.S. Treasury and Federal Reserve are forced to utilize and create more money to cover the deficits, the downgrade is a direct indictment on the status of the U.S. Dollar. Until things change, the value of the U.S. Dollar will continue its slow downward decline.
As customary, the sovereign debt rating is usually the ceiling, as technically the government should carry the highest rating in the land and have access to the best rates.
That is why, shortly after the U.S. credit rating was lowered to AA+, all previous AAA rated entities tied to the U.S. were also downgraded in suit. Fannie, Freddie, and even the counter party clearing firms like the Depository Trust and Options Clearing Corporation, were downgraded. Numerous state and local municipal bonds lost their highest rating, too.
AAA ratings were wiped out across the board, except for a very small group of unique entities.
Standard and Poor’s affirmed, and are maintaining, the AAA credit rating of four U.S. multinational corporations. All four have demonstrated fiscal responsibility, unlike their regulated government. All four possess fortress-like balance sheets and have business plans that are not solely dependent on the U.S. economy. And, S&P highlighted the weakening dollar as yet another boon to their businesses.
The market has pulled back sharply in the past month and the volatility swings have been nearly insane.
However, with every crisis that tests investors' confidence and fear thresholds, it usually opens the door to opportunity and rewards the risk takers.
On Tuesday, the Federal Reserve smashed the yield curve by telegraphing that interest rates will stay at rock bottom for at least two years, according to the FOMC policy statement. The two year Treasury note now yields less than 20 basis points -- essentially the equivalent to the Fed Funds rate that banks lend to each other for overnight loans!
This has had a profound effect on the benchmark 10 year Treasury bond as well, with yields actually touching 2.03% at one point after the Fed's statment.
These four companies, on the other hand, are not only "on sale" due to the recent sell-off in the equity market, but all four distribute annual dividend yields back to shareholders, which are now higher than 10 year Treasury yields!
If you are a value investor looking for opportunity during this treacherous period in the markets, these AAA companies may be a good starting point:
Channel Trading Secrets