AAA Is No God-Given Right

[Saluki]

21 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.

 

Yes, and people keep talking about China/Yuan being a reserve currency.  That won't happen without a huge change in China going from a net exporter to a net importer.  The reason people use the dollar is that, besides being the largest economy, we are a net importer.  Since we have a trade deficit, we've bought more than we sold so there are lots of excess dollars floating around that people can use for international trade.  If it was the Yuan, and they are selling more then they are buying, there would be a shortage of Yuan and what would people use? China could transition to a consumer economy, but they are still trying to grow enough to bring the last one or two hundred million people out of poverty. So it will be a while before that shift is possible. 

 

What other viable alternative exists now?  The Euro?  Dollars and Yuan are gift certificates at Walmart and Costco.  They are valuable because you can cash them in for something at the store. Europe doesn't make enough things like Oil, Agricultural crops, software, or electronics, for people to want to have their gift certificates.  When people steal your credit card, they buy gift cards at Walmart to resell it.  I'm sure they could use it to buy gift cards at Whole Foods, but you have fewer people that you could sell it to.  

[Spooky]

7 minutes ago, Saluki said:

 

Yes, and people keep talking about China/Yuan being a reserve currency.  That won't happen without a huge change in China going from a net exporter to a net importer.  The reason people use the dollar is that, besides being the largest economy, we are a net importer.  Since we have a trade deficit, we've bought more than we sold so there are lots of excess dollars floating around that people can use for international trade.  If it was the Yuan, and they are selling more then they are buying, there would be a shortage of Yuan and what would people use? China could transition to a consumer economy, but they are still trying to grow enough to bring the last one or two hundred million people out of poverty. So it will be a while before that shift is possible. 

 

What other viable alternative exists now?  The Euro?  Dollars and Yuan are gift certificates at Walmart and Costco.  They are valuable because you can cash them in for something at the store. Europe doesn't make enough things like Oil, Agricultural crops, software, or electronics, for people to want to have their gift certificates.  When people steal your credit card, they buy gift cards at Walmart to resell it.  I'm sure they could use it to buy gift cards at Whole Foods, but you have fewer people that you could sell it to.  

 

The people arguing that China and the Yuan will become the reserve currency don't have a clue. The US dollar has decreased as a share of global reserves (60% now) but the decrease hasn't lined up with an increase for the Yuan but rather other smaller countries like Canada, Australia, South Korea and Sweden. The Yuan has a similar share of reserves as Canada at under 3%!

 

How can you have a reserve currency for a country that doesn't have rule of law, doesn't allow its currency to trade freely and has capital controls in place on capital leaving the country? If they allowed capital to move freely into and out of the country my guess is that Chinese citizens would pour even more money overseas.

 

Pretty good eye on the market for this: https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/eye-on-the-market/oh-the-places-we-could-go-amv.pdf

 

Looking around the world the US economy still seems the most robust and dynamic...

 

 

[Castanza]

22 minutes ago, Spooky said:

 

The people arguing that China and the Yuan will become the reserve currency don't have a clue. The US dollar has decreased as a share of global reserves (60% now) but the decrease hasn't lined up with an increase for the Yuan but rather other smaller countries like Canada, Australia, South Korea and Sweden. The Yuan has a similar share of reserves as Canada at under 3%!

 

How can you have a reserve currency for a country that doesn't have rule of law, doesn't allow its currency to trade freely and has capital controls in place on capital leaving the country? If they allowed capital to move freely into and out of the country my guess is that Chinese citizens would pour even more money overseas.

 

Pretty good eye on the market for this: https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/eye-on-the-market/oh-the-places-we-could-go-amv.pdf

 

Looking around the world the US economy still seems the most robust and dynamic...

 

 

Also need a robust bond market for a reserve currency as well….which China doesn’t have. 

[spartansaver]

1 hour ago, Saluki said:

 

Yes, and people keep talking about China/Yuan being a reserve currency.  That won't happen without a huge change in China going from a net exporter to a net importer.  The reason people use the dollar is that, besides being the largest economy, we are a net importer.  Since we have a trade deficit, we've bought more than we sold so there are lots of excess dollars floating around that people can use for international trade.  If it was the Yuan, and they are selling more then they are buying, there would be a shortage of Yuan and what would people use? China could transition to a consumer economy, but they are still trying to grow enough to bring the last one or two hundred million people out of poverty. So it will be a while before that shift is possible. 

 

What other viable alternative exists now?  The Euro?  Dollars and Yuan are gift certificates at Walmart and Costco.  They are valuable because you can cash them in for something at the store. Europe doesn't make enough things like Oil, Agricultural crops, software, or electronics, for people to want to have their gift certificates.  When people steal your credit card, they buy gift cards at Walmart to resell it.  I'm sure they could use it to buy gift cards at Whole Foods, but you have fewer people that you could sell it to.  

I've seen this stated before but does it have to be true? Could the Yuan just continue to appreciate relative to other currencies? I can split a Yuan up into smaller pieces and still transact in Yuan. Have any of the previous reserve currencies been countries that were net exporters? 

[Haryana]

On 8/3/2023 at 6:09 PM, stahleyp said:

I guess I'm in good company.

 

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

 

 

https://www.cnbc.com/id/37498773

 

Negative Reviews for Warren Buffett's Defense of Moody's to Crisis Commission

Alex Crippen | @alexcrippen

 

Published 7:39 PM ET Thu, 3 June 2010

 

Warren Buffett is getting a lot of negative reviews for his appearance under subpoena yesterday (Wednesday) before the Financial Crisis Inquiry Commission.
In response to respectful, but pointed, questioning, Buffett argued that Moody's shouldn't bear all the blamefor giving favorable ratings to subprime mortgage loans that later went horribly bad, sparking the financial crisis we've all been living through these past few years.
Almost everyone, he said, believed at the time that housing prices couldn't crash. "Look at me. I was wrong on it too."
Buffett was there because his Berkshire Hathaway holding company is Moody's largest shareholder with a stake now, after months of selling, of about 13 percent, down from almost 20 percent a year ago.
After the hearing, panel Chairman Phil Angelides told Reuters, "I'm not sure he fully comprehends the range of questions raised about Moody's business practices and culture."
Reuter's Felix Salmon writes that it was "arguably the single worst day of Buffett's life" from a PR standpoint.
Among other pans, Salmon cites Pragmatic Capitalism's criticism of Buffett's Moody's defense: "Angelides (and just about every other rational American) thinks the ratings agencies played a central role in misleading investors. The fact is plain as day to anyone who doesn't own millions of dollars worth of their stock."
Bond Girl writes on Self-Evident that "Buffett has gone from being the authority on value to defending some of the most dysfunctional and socially worthless elements of the global financial system. It’s funny how heroes end up cutting themselves down to size even when no one else can."
On Capital Gains and Games, Edmund Andrews calls Buffett's performance "shameful," adding that "I never thought I would ever say this, but Warren Buffett has turned into an evasive, disingenuous, bumbling buffoon."
Money Watch's John Keefe writes his criticism under the headline, "Warren Buffett Shows His True Colors: Green, and Uncooperative."
Kevin Hall of McClatchy Newspapers focused on one aspect of Buffett's testimony, reporting his assertion that he wasn't tipped off to problems with bonds highly rated by Moody's is a "direct contradiction" of email evidence "presented privately to the panel."
On Fox Business, Charlie Gasparino accuses Buffett of "defending the most corrupt business model in corporate America" (the people issuing the debt pay for that debt to be rated, creating a conflict of interest) just because Moody's was a good investment.
CNBC.com Senior Editor John Carney wrote on this site that "it would be unfair to Buffett to wonder if he is just talking his book here." But he rejects Buffett's view that increased competition among credit rating agencies (by loosening government regulations that support a "duopoly" in the business) could result in more laxity in the ratings.
Carney also highlights Buffett's statement to the Commission that he looks for misrated securities because "that will give us a chance to turn a profit if we disagree."
Carney's conclusion: "The same Buffett who profits from the duopoly status of the top ratings agencies also profits from the mistakes allowed to fester under our anti-competitive system. Perhaps we should think twice before anointing him our oracle when it comes to ratings agency reform."  (emphasis added)

 

[ValueArb]

50 minutes ago, Haryana said:

 

 

https://www.cnbc.com/id/37498773

 

Negative Reviews for Warren Buffett's Defense of Moody's to Crisis Commission

Alex Crippen | @alexcrippen

 

Published 7:39 PM ET Thu, 3 June 2010

 

Warren Buffett is getting a lot of negative reviews for his appearance under subpoena yesterday (Wednesday) before the Financial Crisis Inquiry Commission.
In response to respectful, but pointed, questioning, Buffett argued that Moody's shouldn't bear all the blamefor giving favorable ratings to subprime mortgage loans that later went horribly bad, sparking the financial crisis we've all been living through these past few years.
Almost everyone, he said, believed at the time that housing prices couldn't crash. "Look at me. I was wrong on it too."
Buffett was there because his Berkshire Hathaway holding company is Moody's largest shareholder with a stake now, after months of selling, of about 13 percent, down from almost 20 percent a year ago.
After the hearing, panel Chairman Phil Angelides told Reuters, "I'm not sure he fully comprehends the range of questions raised about Moody's business practices and culture."
Reuter's Felix Salmon writes that it was "arguably the single worst day of Buffett's life" from a PR standpoint.
Among other pans, Salmon cites Pragmatic Capitalism's criticism of Buffett's Moody's defense: "Angelides (and just about every other rational American) thinks the ratings agencies played a central role in misleading investors. The fact is plain as day to anyone who doesn't own millions of dollars worth of their stock."
Bond Girl writes on Self-Evident that "Buffett has gone from being the authority on value to defending some of the most dysfunctional and socially worthless elements of the global financial system. It’s funny how heroes end up cutting themselves down to size even when no one else can."
On Capital Gains and Games, Edmund Andrews calls Buffett's performance "shameful," adding that "I never thought I would ever say this, but Warren Buffett has turned into an evasive, disingenuous, bumbling buffoon."
Money Watch's John Keefe writes his criticism under the headline, "Warren Buffett Shows His True Colors: Green, and Uncooperative."
Kevin Hall of McClatchy Newspapers focused on one aspect of Buffett's testimony, reporting his assertion that he wasn't tipped off to problems with bonds highly rated by Moody's is a "direct contradiction" of email evidence "presented privately to the panel."
On Fox Business, Charlie Gasparino accuses Buffett of "defending the most corrupt business model in corporate America" (the people issuing the debt pay for that debt to be rated, creating a conflict of interest) just because Moody's was a good investment.
CNBC.com Senior Editor John Carney wrote on this site that "it would be unfair to Buffett to wonder if he is just talking his book here." But he rejects Buffett's view that increased competition among credit rating agencies (by loosening government regulations that support a "duopoly" in the business) could result in more laxity in the ratings.
Carney also highlights Buffett's statement to the Commission that he looks for misrated securities because "that will give us a chance to turn a profit if we disagree."
Carney's conclusion: "The same Buffett who profits from the duopoly status of the top ratings agencies also profits from the mistakes allowed to fester under our anti-competitive system. Perhaps we should think twice before anointing him our oracle when it comes to ratings agency reform."  (emphasis added)

 

Man, people were really butthurt back then.

[scorpioncapital]

The criticism of Moodys can extend to the banks, to the very homeowners themselves I suppose. One can always say you shouldn't take free money if it can come back to haunt you. The question is if in the order of disreputable actors throughout the entire financial system there were more or less severe cases of fraud or ignorance..btw I think Moodys also paid some settlement?

 

[Cigarbutt]

Somehow, there seems to be relevance to this quote from the Book section and "Outlive", in a post written by @wondering, and this section:

"Attia's editorial on the current medical system is spot on in my opinion.  There is not nearly enough done for preventative care.  Health care is really sick care.  Once you you have heart disease, it is really hard to restore you back to your original healthy self.  It's much better to do testing (eg early extensive lipids tests) and interventions when a person is in their 20s, 30s, and 40s, rather than waiting until they are 70 and their arteries are totally clogged."

-----

It's not clear if Fitch has any insight in coronary artery disease but it's been shown that there is a threshold of %blockage and risk of a myocardial infarct and maybe the rating agency is wondering about the Character aspect of credit and the %level (per GDP) of federal spending:

Updated Classification System Captures Many More People at Risk for Heart Attack - 01/11/2017 (hopkinsmedicine.org)

-----

Investment implication? i'm not sure but, on a net basis, it's likely to be negative?

-----

Yesterday, at a soccer game (watching my youngest daughter, aged 16), a father came to see me ("Hey! Are you...long time no see etc etc"), we knew each other from high school, last time we talked was about 40 years ago). Several aspects struck me. He probably noticed my hair loss? One of the aspects i noted was the waist circumference. Of course, in such a slow and progressive process, it's mostly obvious to outsiders with perspective. Should i have been frank with him? No way! So, i wrote this anonymous post, FWIW.

[mattee2264]

Worth noting that the US economy is at full employment and any maturing government debt will need refinancing at higher interest rates.

And if the US economy goes into recession that will automatically increase the budget deficit as unemployment benefits go up and tax receipts go down. 

 

[Haryana]

 

We get distracted with discussions on the extreme, that is, whether there will be a default.

However, this rating is only the slightest downgrade from the topmost rating. This only calculates probabilities.

How can Moody's say zero probability when we just had a Trump full term ending with 21 gun salute from a battery of four cannons?

 

https://www.cnbc.com/2023/05/11/trump-endorses-debt-ceiling-default.html

When pushed by CNN anchor Kaitlan Collins to clarify his remarks, Trump said: “Well, you might as well do it now, because you’ll do it later. Because we have to save this country. Our country is dying. Our country is being destroyed by stupid people, by very stupid people.”

 

[ValueArb]

On 8/9/2023 at 2:18 PM, Haryana said:

 

We get distracted with discussions on the extreme, that is, whether there will be a default.

However, this rating is only the slightest downgrade from the topmost rating. This only calculates probabilities.

How can Moody's say zero probability when we just had a Trump full term ending with 21 gun salute from a battery of four cannons?

 

https://www.cnbc.com/2023/05/11/trump-endorses-debt-ceiling-default.html

When pushed by CNN anchor Kaitlan Collins to clarify his remarks, Trump said: “Well, you might as well do it now, because you’ll do it later. Because we have to save this country. Our country is dying. Our country is being destroyed by stupid people, by very stupid people.”

 

 

If only he had been president and had both houses were controlled by his party, then we could have done something about the debt Armageddon.

[Guest]

Been out of town but I'm back so here we go.

 

For the "US is going to default 

On 8/4/2023 at 10:13 PM, Haryana said:

 

 

https://www.cnbc.com/id/37498773

 

Negative Reviews for Warren Buffett's Defense of Moody's to Crisis Commission

Alex Crippen | @alexcrippen

 

Published 7:39 PM ET Thu, 3 June 2010

 

Warren Buffett is getting a lot of negative reviews for his appearance under subpoena yesterday (Wednesday) before the Financial Crisis Inquiry Commission.
In response to respectful, but pointed, questioning, Buffett argued that Moody's shouldn't bear all the blamefor giving favorable ratings to subprime mortgage loans that later went horribly bad, sparking the financial crisis we've all been living through these past few years.
Almost everyone, he said, believed at the time that housing prices couldn't crash. "Look at me. I was wrong on it too."
Buffett was there because his Berkshire Hathaway holding company is Moody's largest shareholder with a stake now, after months of selling, of about 13 percent, down from almost 20 percent a year ago.
After the hearing, panel Chairman Phil Angelides told Reuters, "I'm not sure he fully comprehends the range of questions raised about Moody's business practices and culture."
Reuter's Felix Salmon writes that it was "arguably the single worst day of Buffett's life" from a PR standpoint.
Among other pans, Salmon cites Pragmatic Capitalism's criticism of Buffett's Moody's defense: "Angelides (and just about every other rational American) thinks the ratings agencies played a central role in misleading investors. The fact is plain as day to anyone who doesn't own millions of dollars worth of their stock."
Bond Girl writes on Self-Evident that "Buffett has gone from being the authority on value to defending some of the most dysfunctional and socially worthless elements of the global financial system. It’s funny how heroes end up cutting themselves down to size even when no one else can."
On Capital Gains and Games, Edmund Andrews calls Buffett's performance "shameful," adding that "I never thought I would ever say this, but Warren Buffett has turned into an evasive, disingenuous, bumbling buffoon."
Money Watch's John Keefe writes his criticism under the headline, "Warren Buffett Shows His True Colors: Green, and Uncooperative."
Kevin Hall of McClatchy Newspapers focused on one aspect of Buffett's testimony, reporting his assertion that he wasn't tipped off to problems with bonds highly rated by Moody's is a "direct contradiction" of email evidence "presented privately to the panel."
On Fox Business, Charlie Gasparino accuses Buffett of "defending the most corrupt business model in corporate America" (the people issuing the debt pay for that debt to be rated, creating a conflict of interest) just because Moody's was a good investment.
CNBC.com Senior Editor John Carney wrote on this site that "it would be unfair to Buffett to wonder if he is just talking his book here." But he rejects Buffett's view that increased competition among credit rating agencies (by loosening government regulations that support a "duopoly" in the business) could result in more laxity in the ratings.
Carney also highlights Buffett's statement to the Commission that he looks for misrated securities because "that will give us a chance to turn a profit if we disagree."
Carney's conclusion: "The same Buffett who profits from the duopoly status of the top ratings agencies also profits from the mistakes allowed to fester under our anti-competitive system. Perhaps we should think twice before anointing him our oracle when it comes to ratings agency reform."  (emphasis added)

 

 

Do you have a point?

[Guest]

On 8/3/2023 at 10:27 PM, Parsad said:

 

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!

 

 

Who owns a lot of the debt that you're so worried about?

[Spekulatius]

Is there any consequence for the risk weighting of US bonds or GSE paper for banks holding these on the balance sheet? I know the downgrading from AAA to AA+ isn't much but the risk weighting for these is low too and there is tons on the balance sheet so I think there could be some impact on the CET1 ratio.

Edited August 14, 2023 by Spekulatius

[Haryana]

On 8/4/2023 at 8:13 PM, Haryana said:

Carney's conclusion: "The same Buffett who profits from the duopoly status of the top ratings agencies also profits from the mistakes allowed to fester under our anti-competitive system. Perhaps we should think twice before anointing him our oracle when it comes to ratings agency reform."  (emphasis added)

 

On 8/14/2023 at 1:19 PM, stahleyp said:

Been out of town but I'm back so here we go.

 

For the "US is going to default 

 

Do you have a point?

Point: Buffett is No God-given prophet/oracle and Moody's No God-given agency.

[Guest]

12 hours ago, Haryana said:

Point: Buffett is No God-given prophet/oracle and Moody's No God-given agency.

 

I agree with you here.

 

I will also say that Buffett probably understands the finanical system more than the vast, vast majority of people. 

[Haryana]

 

https://www.theglobeandmail.com/investing/markets/stocks/BND-Q/pressreleases/21252268/whats-worse-than-the-dot-com-crash-the-bond-market/

What’s Worse Than the Dot Com Crash? The Bond Market!

"From 2008 to today, total public government debt has increased from $9 trillion to $33.58 trillion.  By the time you read this, it will be over $33.6 trillion. The treasury department sells bonds to help pay the interest payments on that debt. That said, they are selling more bonds than ever before. To get buyers to purchase these bonds, they are forced to offer higher yields, which pushes the price of bonds down. The recent downgrade by Fitch Ratings made the situation worse by bringing into question the US’s ability to make the interest payments they owe."