Friday, May 22, 2009

Quick hit. Gross on the USA losing its AAA rating....

"PIMCO's Gross: U.S. at risk of losing top AAA rating - Reuters
Reuters reports Bill Gross warned on Thursday the U.S. will eventually lose its top AAA credit rating, a fear that had already spooked financial markets on Thursday and could keep the dollar, stocks and bonds under heavy selling pressure. The United States will face a downgrade in "at least three to four years, if that, but the market will recognize the problems before the rating services -- just like it did today," Gross told Reuters. Gross earlier had told Reuters via email that market declines on Thursday were due to investor fears that the United States is "going the way of the UK -- losing AAA rating which affects all financial assets and the dollar." S&P on Thursday lowered its outlook on Britain to "negative" from "stable," threatening the nation's top AAA rating. Britain faces a one in three chance of a ratings cut as debt approaches 100% of gross domestic product."

AlphaNinja - It's not complicated. When you massively expand government, mostly with borrowed (foreign) money, you'd better be able to service that debt. Instead our leaders are demonizing wealth creation - or in other words, tax creation. Add Cap and Trade legislation, and you're crippling the economy that you depend on to pay for government spending.

I'm not so worried about the credit agencies downgrading the US. They've proven themselves to be near worthless and almost contrary indicators, based on the timing of their downgrades. Our debt will be purchased - BUT only if it remains the best option out there. If the USA becomes over-taxed and under-competitive, we will no longer be the best place for parking money.

A chart courtesy of Bespoke, illustrating the "contrary indicator" timing ability of the credit agencies. Default risk drops 50% from its highs to the point at which the S&P downgrades the UK:

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