You want a good laugh, Fellow Reckoner? We’ve got a great joke for you, courtesy of Standard & Poor’s Ratings Services Inc. But first, the news…
We had other notes prepared for you this morning, but then this headline crept across our screen:
“S&P Moves US Outlook to Negative”
The Wall Street Journal provides some details…
“Standard & Poor’s Ratings Services Inc. cut its outlook on the US to negative, increasing the likelihood of a potential downgrade from its triple-A rating, as the path from large budget deficits and rising government debt remains unclear.”
Stock markets, which apparently still hold faith in the ratings agencies’ foresight (despite the agencies’ best efforts to avoid deserving it), promptly reversed course from their ever-and-always upward trend after the news. The Dow, for its part, fell a couple hundred points at the open. The S&P 500 and the NASDAQ were last seen bleeding from similar sized wounds.
Could it be the impending breech of that looming debt ceiling that has the ratings gurus spooked?
“Given the fact the US government is 28 days away from bumping up against the $14.3 trillion debt ceiling,” wrote Addison in today’s edition of The 5, “we suspect the question of Uncle Sam’s ability, let alone political will, to pay is too obvious to ignore.”
Even the most “aggressive” cuts to the budget would still require heretofore-unimaginable levels of new borrowing and/or money printing. Continues Sr. Wiggin:
“The current White House budget plan requires lifting the ceiling to $20.8 trillion by 2016. Wisconsin Rep. Paul Ryan’s plan, passed by the House on Friday, would require a ceiling of $19.5 trillion, according to figures compiled by Bloomberg.”
Of course, even Rep. Ryan’s plan is likely to fall flat in the Democrat-controlled Senate. But aside from all that, the debt ceiling story is hardly anything new, as Addison’s letter to deaf ears, penned way back in January, shows.
[Ed. Note: For readers interested in the end of debt supercycles and how they change everything, may we suggest John Mauldin’s book, Endgame: The End of the Debt SuperCycle and How It Changes Everything.
We’re offering it through our Laissez-Faire Books outlet for $15.30…which is lower than any price on Amazon. Grab a copy here.]
Whatever their reason for the outlook adjustment, S&P is still, for the moment, committed to maintaining the US’s AAA rating. Of course, readers will do well to remember the appalling track record of the three, government-anointed agencies before and during the last (and, in many peoples’ opinions, ongoing) financial crisis. All of the so-called “Big Three” – S&P, Moody’s and Fitch – were trotting out AAA ratings for the most toxic MBSs on Wall Street right up until their collapse brought us, in one frantic politician’s words, “to the edge of the abyss,” back in 2007-08.
What’s the point of having a fire alarm if it only goes off when your house is burned to the ground? We have no idea. To us, putting reason where there is none seems as futile and misguided a task as slapping AAA ratings on the backs of those who don’t truly deserve them. Something’s gonna come unstuck.
But just for entertainment value, let’s take a look at what S&P had to say for themselves regarding their defense of the US’s current AAA status. (And herein lies today’s promised joke…)
From S&P’s official statement:
“Our ratings on the US rest on its high-income, highly diversified, and flexible economy, backed by a strong track record of prudent and credible monetary policy. The ratings also reflect our view of the unique advantages stemming from the dollar’s preeminent place among world currencies.”
“…prudent and credible monetary policy…”? That’s what we’re calling unabashed, bald-faced money-printing these days?
“…the dollar’s preeminent place among world currencies…”? That’s what we’re calling the temporary though fast-eroding kindness-of- strangers-borrowing-scheme?
Oh stop it, S&P…our sides are splitting!
The agency, barely clinging to any demonstrable comprehension of reality, goes on to note:
“Although we believe these strengths currently outweigh what we consider to be the US’s meaningful economic and fiscal risks and large external debtor position, we now believe that they might not fully offset the credit risks over the next two years at the ‘AAA’ level.”
Tough talk, indeed.
Fellow Reckoner, at the end of the day, it’s probably worth recognizing these announcements for what they really are: Johnny-come-lately, sideshow distractions. Usually, by the time the ratings agencies have arrived on the crime scene, the perpetrator is already over the border, enjoying a few daiquiris under a far away palm tree. If their analysis is to be taken seriously at all, it is surely more useful in the post- mortem stage than in any kind of predictive capacity.
For Daily Reckoning Australia