Giving the U.S. a quadruple-A rating... Inflation is default... A "$2 trillion math error"... Geithner says "no risk" of a downgrade... European easing begins (again)... Greece bans short sales... Italy halts trading... Gold is better than stocks... China slams the U.S....
"In Omaha, the U.S. is still triple-A. In fact, if there were a quadruple-A rating, I'd give the U.S. that." – Warren Buffett
As you've surely heard, Standard & Poor's downgraded the U.S. credit rating one notch to "double-A-plus" late Friday. It's the first time in history the U.S. has not been granted the highest ("triple-A") rating.
The downgrade wasn't a surprise to readers of our research... We've been warning of a U.S. downgrade for years. But Warren Buffett doesn't see any issues with our nation's financial situation. Buffett also said he doesn't pay attention to credit ratings agencies' opinions. (Ironic, considering Buffett's Berkshire Hathaway is Moody's largest shareholder.)
Buffett continued, in an interview with CNBC... "Think about it. The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will. Now if you're talking about inflation, that's a different question."
Buffett is missing an important fact. He's right that the U.S. cannot technically default, because it can print money… But as even Buffett acknowledges, that money-printing will lead to inflation. And inflating your way out of debt is the same as default. It hurts anyone holding U.S. dollars (both sovereigns and individuals with savings). And it's more harmful in the long run.
After S&P downgraded the U.S., the White House and the Treasury refuted the claims, calling the downgrade a "$2 trillion math error." The government claims S&P made an accounting error... "They've shown a stunning lack of knowledge about basic U.S. fiscal budget math," Treasury Secretary Tim Geithner said in an interview with CNBC. "And I think they drew exactly the wrong conclusion from this budget agreement."
Geithner also chided S&P for "really terrible judgment" when downgrading the U.S.
We argue S&P is 100% correct… That the government is blaming the downgrade on an accounting issue is a joke. The U.S. is staring $100 trillion in unfunded liabilities in the face, and it's bickering about this downgrade. That's part of the reason S&P downgraded the U.S. in the first place... The government isn't serious... And S&P has little faith in the government's ability to handle an issue of this magnitude.
And just for fun, we'll revisit an April 2011 interview Geithner did with Peter Barnes from Fox News. (Thanks to Zero Hedge for the reminder.)
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Peter Barnes: "Is there a risk that the United States could lose its AAA credit rating? Yes or no?" |
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Tim Geithner: "No risk of that." |
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Barnes: "No risk?" Geithner: "No risk." |
Despite the downgrade, Treasurys are still viewed as the safest asset in the world. Prices rose and yields fell on the 10-year bond.
The S&P downgrade is really a warning for the government to get its finances in order. The real chaos will come when the market "downgrades" Treasurys... When sovereign buyers suddenly don't bid at a Treasury auction and demand higher interest rates. That time will come. In fact, we made a video of the speech Obama will give on that day, and how your life will change when the world no longer wants Treasurys. You can watch it here...
That kind of "market downgrade" is already happening in Europe. Investors are demanding higher and higher interest rates to buy debt from the PIIGS (Portugal, Ireland, Italy, Greece, and Spain). For a great recap of the European crisis, I recommend you read last Friday's Digest.
In that Digest, we reiterated our belief that the European Central Bank (ECB) will print tons of money to solve the crisis...
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We continue to believe the ECB must, eventually, paper over these bad debts with an enormous bond-buying program that would dwarf the quantitative easing we've seen so far in the U.S. And we believe – as we've written for many months – the U.S. Federal Reserve will ultimately backstop the program to ensure it doesn't destroy the euro. But still... we wonder... how long will anyone, anywhere, accept the paper currencies of obviously bankrupt governments and their puppet banks? We don't know. And we're not optimistic. – Porter Stansberry, S&A Digest, August 5, 2011 |
Today, the European Central Bank (ECB) started buying Italian and Spanish bonds. The yield on 10-year Italian debt fell 82 basis points to 5.277%. Spanish yields fell 89 basis points to 5.16% – the biggest one-day drops since the start of the euro. Royal Bank of Scotland predicted the Italian and Spanish bond buying program would eventually reach $1.2 trillion. We predict it will be much larger. And we believe a great portion of that money will come from the U.S. (Over the weekend, Geithner called for Europe to increase its easing.)
In typical government fashion, instead of addressing the core issues behind the European crisis, Europe is once again blaming the short sellers. Starting tomorrow, Greece will ban short selling for two months. In Italy, the financial regulator halted trading of Fiat and Pirelli after big losses. (These aren't financial stocks... They make cars and tires.)
In addition to Treasurys, gold is also soaring today. Gold is up over $53 an ounce to $1,717. Goldman Sachs raised its 12-month gold target to $1,830. JP Morgan is calling for the precious metal to hit $2,500 an ounce by year-end, up from $1,800 an ounce before the downgrade.
And for the first time this year, gold has outperformed stocks since the market bottom in March 2009.
Gold is soaring – and stealing all the headlines. But silver is still under $40 an ounce. Compared to where it was trading for most of the last three years, silver is cheap next to gold. We don't think this will last for long...
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New 52-week highs (as of 8/5/11): SPDR Gold Trust (GLD).
Don't miss some kind words from a childhood idol of Steve and Porter's below. Send your feedback to feedback@stansberryresearch.com.
"I find it hard to believe that people cancel their subscriptions after your Friday version of the S&A Digest. I look forward to this every week. One of the most rewarding things that I have gained from reading all the stuff you guys put out, is the actual knowledge & understanding of what is going on out there in the big bad world. How can anyone feel comfortable making investment and trading decisions with their hard earned money, if they do not even slightly understand why they are risking their money. Some people just want to blindly do what someone tells them. Not me, and not a lot of other people, either. I am actually starting to understand the 'big' picture thanks to you guys. It feels Great!! I will not be one of those canceling my subscription on Monday. Keep it coming. The more info you can feed to me the better I feel." – Paid-up subscriber Tim Wentling
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"I am not usually the one who takes the time to write such letters but I thought that now it would be most appropriate. Being a surfer and photographer for the past 3 decades, I have extensively traveled the world in a very eclectic manner with free spirited others that indulge in what they see as their truth.
"We speak and do as we feel and express ourselves through our actions with nature. There is a defined set of truths when playing in nature. My knowledge has been gained by experience as well as observation, where personal responsibility is the law of life. When I first heard about your research group, I read a couple of your writings, and without hesitation, invested in a life Alliance membership.
"I am a man of modest means, but surround myself with quality be it thoughts or acquaintances. It is my desire to learn through your group's knowledge to become as independent in my investments, as I am in my life.
"Now for the purpose of this letter.
"I wanted to take this opportunity to congratulate you on your free-spirited truth based on knowledge and research, but most of all for your courage and caring for others by trying to educate them. Educate them by speaking of events and truths that few will address in this illusion of a world we are living in.
"Politicians and their lies and manipulation of the mass sadden me beyond words, and I have watched as abuses that once existed in far away lands have become the norm on our shores. Along with all the great advise you and your staff give to the public I would like to add in words that may parallel you own.
"Freedom is the one of the greatest gifts in this lifetime. Our wealth is determined by our health, personal as well as financial freedom. thank you for speaking out, there are those in other walks of life far from your own that feel the same truth." – Paid-up subscriber Jeff Hornbaker
Goldsmith comment: Jeff Hornbaker is one of the most respected surf photographers in the world... And Steve and Porter grew up admiring his photos in surf magazines. Thanks for the feedback, Jeff.
Regards,
Sean Goldsmith
Baltimore, Maryland
August 8, 2011