Saturday, 23 April 2011

S&P throws down the gauntlet! Prepare for the consequences!

 

Mike LarsonAlmost one year ago, Weiss Ratings challenged the major credit ratings agencies. The gist of the message? Stop dillydallying around and downgrade the long-term sovereign debt rating of the United States in order to help protect investors and prod Washington to fix its finances … before it’s too late.

In the release, Weiss Ratings Chairman Martin D. Weiss wrote:

“The U.S. government’s triple-A rating is an anachronism. Given the rapid deterioration in our nation’s finances and the spreading threat to sovereign debt overseas, a downgrade is long overdue.

“By reaffirming the government’s triple-A rating, the three leading rating agencies help entice savers and investors to pour trillions more into a potential debt trap, or, at best, to be severely underpaid for the actual risks they are taking. The rating agencies give policymakers a green light to perpetuate their fiscal follies, further degrading our government’s ability to meet future obligations. And, they help create a false sense of security overall. Recognizing and confronting our nation’s financial troubles with honesty is the necessary first step toward solving them.”

Now, it appears the agencies are finally starting to get the message! In a landmark cannon-shot fired across Washington’s bow, Standard & Poor’s warned that the U.S.’s AAA credit rating is at risk.

If I’m right, this could be the start of a major upheaval in the fixed income, currency, and stock markets. That turmoil will likely have serious consequences for your portfolio, so there’s no time to waste. You have to start preparing now!

The Beginning of the End for Our
“AAA” Stamp of Approval?

So what exactly happened on Monday? Well, the major ratings agencies (S&P, Moody’s, Fitch) don’t just rate the creditworthiness of corporations. They also rate entire COUNTRIES.

They evaluate everything from debt-to-GDP ratios to budget deficits to the political environments of various sovereign nations, then determine what letter grades their debt securities should earn. They also issue outlooks about the future — whether rating increases or downgrades are more likely down the road.

S&P has given the U.S. a “AAA” — its top rating — since the agency’s founding in 1941. It has also always given the U.S. a “stable” ratings outlook. But that changed this week, when S&P slashed that outlook to “negative.”

Specifically, the agency warned that the U.S. has “very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us.” The agency further said that “more than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on a strategy to reverse recent fiscal deterioration or address longer-term fiscal pressures.”

Bottom line: There’s at least a 1-in-3 chance the U.S. will lose its AAA rating between now and 2013.

S&P Following Weiss’ Lead —
Expect More to Follow!

We’ve established before that the ratings agencies are often behind the curve with ratings actions — and that’s clearly the case once again. As I noted earlier, Martin urged action on the ratings back in mid-2010, and I’ve been sounding warnings on the U.S. debt and deficit situation for months on end.

In early January 2011, for example I said that the deficit picture was getting worse and worse, and that politicians were failing to do anything about it …

“Just a few weeks after pledging a new era of fiscal responsibility and releasing a supposedly ‘landmark’ deficit-cutting plan, Washington politicians went back on their word. They announced a massive tax cut and stimulus package that will drive the budget deficit to more than $1.3 trillion in fiscal 2011.” (Editor’s Note: Since then, the deficit forecast has risen to $1.65 trillion.)

In December 2010, I pointed out that many European countries were collapsing under the weight of their huge debts and deficits. But did policymakers take the advance warning provided by Greece, Portugal, Ireland, and the others to heart? My response was crystal clear …

“You’d think U.S. policymakers would be learning an important lesson from the European debt crisis. You’d think they would take drastic steps to get OUR national finances in order … before a similar sell off hits home. But you’d be dead wrong!”

Heck, way back in March 2010, I warned that market players with billions of dollars on the line were trading Uncle Sam’s debt as if it was riskier than debt issued by certain U.S. corporations! My warning …

“Treasury Secretary Tim Geithner recently sat in front of ABC News cameras and made a solemn pledge. Asked about whether the U.S.’s credit rating would drop below AAA, he said, ‘Absolutely not.’

“You know what though? Talk is cheap. Policymakers can bloviate all they want. But the bond market renders its verdict on the credit quality of everyone from municipalities to corporations to governments each and every trading day … and right now, the trading action proves the U.S. is guilty of running a profligate, debt-ridden operation, one that’s in worse shape than some American corporations.”

Advertisement

What to Expect Next …

Now that the ratings agencies are starting to walk down the trail that Weiss first blazed, you can expect far-reaching consequences.

Indeed,

  • If we do not get off this dangerous path …
  • If Republicans and Democrats in Congress and the Obama administration don’t restore fiscal sanity and …
  • If the Federal Reserve doesn’t put a halt to its disastrous monetary policy …

The purchasing power of your dollars will collapse. Precious metals will explode in value. The price of key commodities like crude, cotton, copper, and cattle will surge even further!

Plus, the cost of borrowing will soar as bond yields shoot higher. And stocks will eventually implode as all the money printing in the world can’t overwhelm the real economic fallout of those events forever.

Do you want to leave yourself exposed to all these dire consequences? Do you want to be left twisting in the wind when the U.S. loses its AAA rating? I trust the answer is no.

So if you haven’t already, please view the American Apocalypse video we’ve prepared for you. It’s available for free, online — just click here.

Until next time,

Mike

http://www.moneyandmarkets.com/sp-throws-down-the-gauntlet-prepare-for-the-consequences-44216

No comments:

Post a Comment