AAA Is No God-Given Right

[Haryana]

Ex-S&P Analyst Who Cut US Rating in 2011 Says AAA Is No God-Given Right

https://finance.yahoo.com/news/ex-p-analyst-cut-us-213950106.html

 

“The underlying fiscal position and underlying debt trajectory has picked up pace,” Beers, who is now a senior fellow at the Center For Financial Stability, said on Bloomberg Television. “AAA is the top rating any rating agency can assign, but of course, the US and any other sovereign that’s being rated has no god-given or automatic right to that.”

 

In August 2011, Beers and John Chambers shocked markets by stripping the US of its AAA grade at S&P, dropping it by one level to AA+ for the first time in history. Fitch on Tuesday cut the US credit grade to AA+, triggering its own wave of criticism.

 

[ValueArb]

I haven’t understood the “we can print money” counter argument to Fitch’s assessment that US debt load is getting too high. How does hyperinflation make debt safer?

[Gregmal]

I haven’t understood why anyone cares either way. The ratings are a joke put together by idiots rife with conflict of interest and no real purpose. Like does anyone know how the ratings agencies make money? It’s so dumb. 

[matthew2129]

54 minutes ago, ValueArb said:

I haven’t understood the “we can print money” counter argument to Fitch’s assessment that US debt load is getting too high. How does hyperinflation make debt safer?

Aren't credit ratings explicitly just an assessment of the issuer's ability to pay contractual interest and principal when due? 

 

If they were rating "real" returns then shouldn't Berkshire's and Microsoft's bonds with coupons of <1% issued in 2020 be getting downgrades? 

Edited August 3, 2023 by matthew2129

[Parsad]

51 minutes ago, Gregmal said:

I haven’t understood why anyone cares either way. The ratings are a joke put together by idiots rife with conflict of interest and no real purpose. Like does anyone know how the ratings agencies make money? It’s so dumb. 

 

True.  But if you have multiple downgrades, your cost of borrowing will increase significantly.  Indebted people or indebted nations...makes no difference.   Too much debt will eff you up! 

 

When Paulson and Geithner are both saying that the U.S. needs to get their fiscal house in order...maybe they should.  And in my opinion, not just the U.S.  Practically every Western country piled on the debt during the pandemic.  Time to pay the piper!  Cheers!

[Guest]

I bet they feel important now. If a government, that is (right now, at least) the world's reserve currency and strongest military...isn't AAA, what could be?

[Guest]

1 minute ago, Parsad said:

 

True.  But if you have multiple downgrades, your cost of borrowing will increase significantly.  Indebted people or indebted nations...makes no difference.   Too much debt will eff you up! 

 

When Paulson and Geithner are both saying that the U.S. needs to get their fiscal house in order...maybe they should.  And in my opinion, not just the U.S.  Practically every Western country piled on the debt during the pandemic.  Time to pay the piper!  Cheers!

 

That is not how the system works...at all. 

[Parsad]

8 minutes ago, stahleyp said:

 

That is not how the system works...at all. 

 

Ok Paul. 

 

Frickin' yields on long-term treasuries have risen dramatically and you're telling me that's not how it works...at all!  Whatever!

 

Cheers!

 

[Guest]

2 minutes ago, Parsad said:

 

Ok Paul. 

 

Frickin' yields on long-term treasuries have risen dramatically and you're telling me that's not how it works...at all!  Whatever!

 

Cheers!

 

haha Sanj, think about it.

 

If you are correct, why are rates signficantly lower now than they were in the 1970s even though our debt load is way, way, way higher? Isn't the US closer to "bankruptcy" now?

[Parsad]

1 minute ago, stahleyp said:

 

haha Sanj, think about it.

 

If you are correct, why are rates signficantly lower now than they were in the 1970s even though our debt load is way, way, way higher? Isn't the US closer to "bankruptcy" now?

 

Growth in GDP and 20 years of lower interest rates helped.  Doesn't mean you're going to see low interest rates in the next 20 years.  Cheers!

[Guest]

What company/individual gets a lower interest rate as they become more financially unstable?

 

Where's Bill when we need him?

[Guest]

I just looked this up since I didn't know the answer for sure but in 1980 the US national debt was $908 billion and GDP was $2.857 trillion.

 

As of 2021, US debt was a bit less than $30 trillion and $23.32 trillion GDP 

 

I don't think I need to do the math to show that the debt rate has destroyed the gdp growth rate. 

 

So if your view is accurate, why are interest rates lower now than they were in 1980? 

[Parsad]

6 minutes ago, stahleyp said:

I just looked this up since I didn't know the answer for sure but in 1980 the US national debt was $908 billion and GDP was $2.857 trillion.

 

As of 2021, US debt was a bit less than $30 trillion and $23.32 trillion GDP 

 

I don't think I need to do the math to show that the debt rate has destroyed the gdp growth rate. 

 

So if your view is accurate, why are interest rates lower now than they were in 1980? 

 

Because of all of the influence by governments around the world.  It's why the 2000 bubble was re-inflated not once but twice (2009 & 2020) without a proper correction.  Government balance sheets grew massively, artificially suppressing interest rates to achieve 2% inflation.  Now they can't do that anymore without significant consequences and interest rates are rising quickly as balance sheets are unwound and government spending slows.  Cheers!

[Guest]

39 minutes ago, Parsad said:

 

Because of all of the influence by governments around the world.  It's why the 2000 bubble was re-inflated not once but twice (2009 & 2020) without a proper correction.  Government balance sheets grew massively, artificially suppressing interest rates to achieve 2% inflation.  Now they can't do that anymore without significant consequences and interest rates are rising quickly as balance sheets are unwound and government spending slows.  Cheers!

 

What does "proper correction" mean? Two 50% drawdowns isn't a "correction"? 

 

Couldn't government balance sheets grew even more massively to suppress rates forever? Why can't they do it anymore? 

[Guest]

I guess I'm in good company.

 

https://www.cnn.com/2023/08/03/business/warren-buffett-fitch-downgrade/index.html

[Parsad]

3 hours ago, stahleyp said:

 

What does "proper correction" mean? Two 50% drawdowns isn't a "correction"? 

 

Couldn't government balance sheets grew even more massively to suppress rates forever? Why can't they do it anymore? 

 

You had two market corrections, but the government balance sheet still has nearly $10T on its books that it didn't have 15 years ago.

 

Sure, you could do it as long as possibly Japan has, but it's a ponzi.  If and when markets and investors lose faith or find a far better alternative, it will be a day of reckoning.  

 

Cheers!

[Parsad]

2 hours ago, stahleyp said:

I guess I'm in good company.

 

https://www.cnn.com/2023/08/03/business/warren-buffett-fitch-downgrade/index.html

 

Buffett isn't worried at the moment just like he said in the 2018 letter about owning stocks rather than gold and not worrying about deficits and debt, but if you continue to accumulate debt relative to GDP, I can assure you he won't be voicing reassuring words of comfort as global investors in U.S. treasuries may start to look elsewhere.  Cheers!

[Haryana]

https://www.nytimes.com/2009/03/18/business/18buffett.html

 

Buffett Is Unusually Silent on Rating Agencies

 

"Moody’s rated Lehman Brothers’ debt A2, putting it squarely in the investment-grade range, days before the company filed for bankruptcy. And Moody’s gave the senior unsecured debt of the American International Group, the insurance behemoth, an Aa3 rating which is even stronger than A2 the week before the government had to step in and take over the company in September as part of what has become a $170 billion bailout."

 

[bizaro86]

8 hours ago, stahleyp said:

I bet they feel important now. If a government, that is (right now, at least) the world's reserve currency and strongest military...isn't AAA, what could be?

 

Debt investing is about two things - ability and willingness to pay. Investors often abridge this to ability to pay, but willingness matters as well. If a car loan borrower decides not to pay and let the car be repossessed, that isn't good for the lender generally, which is why people with a job and a history of responsible behavior get better rates than those with a job and no credit history.

 

The US govt debt is all in USD, and they can always print more so ability to pay is a non-issue. But there are political hijinks around the debt ceiling pretty often now, and if you play chicken enough times eventually both drivers don't turn and everyone dies. I think a default on the US debt (where at least some principal/interest doesn't get paid on time) is likely enough for political reasons that AAA doesn't seem like right rating.

[Dave86ch]

The greatest Ponzi scheme after the Denarius.

 

 

 

[Spooky]

6 hours ago, bizaro86 said:

But there are political hijinks around the debt ceiling pretty often now, and if you play chicken enough times eventually both drivers don't turn and everyone dies

 

Isn't this the main reason of the downgrade? The potentially for a default due to political brinkmanship?

[Saluki]

2 hours ago, Spooky said:

 

Isn't this the main reason of the downgrade? The potentially for a default due to political brinkmanship?

 

That's my take on it.  The reason that Treasuries were always viewed as the "risk free" rate is that dollar denominated debts by the US government won't default because you can always pay it back by printing more money.  It may not be a great idea to keep printing money, but if you are owed $1mm, you will get $1mm in nominal dollars. What the political brinksmanship has introduced is a scenario where the possibility exists that they won't pay it back as agreed.  "It's not that I can't pay you, it's just that I don't want to."  So if that scenario is now possible, then is it risk free?   I think the downgrade is a nothing burger because that game of chicken ended, so to downgrade months later when an agreement has already been reached is kind of silly.  Not to mention damaging to people seeking a mortgage.  

[LC]

10 minutes ago, Saluki said:

The reason that Treasuries were always viewed as the "risk free" rate is that dollar denominated debts by the US government won't default because you can always pay it back by printing more money

 

Well, every sovereign can just print more money, it doesn't mean every country is rated AAA.

The US was rated AAA because it represents the strength of the regime. I can see how political strife over the past decade could show a few cracks. 

 

I still disagree with the downgrade because (1) like Greg said who gives a damn, and (2) ratings are relative, and the US is still a relatively strong regime.

[Castanza]

7 minutes ago, LC said:

 

Well, every sovereign can just print more money, it doesn't mean every country is rated AAA.

The US was rated AAA because it represents the strength of the regime. I can see how political strife over the past decade could show a few cracks. 

 

I still disagree with the downgrade because (1) like Greg said who gives a damn, and (2) ratings are relative, and the US is still a relatively strong regime.

Exactly right. The way I think about it is ok you downgrade the US….who’s taking that place as top dog? Nobody yet….so it’s a nothing burger. Unless the world order changes, credit ratings don’t matter as much as pecking order. 

[gfp]

This triple A nonsense is right up there with "Social Security is going to run out of money!!!"  just stupid