Home About Archives RSS Feed

The Independent Investor: A Warning Shot Across Our Bow

Bill Schmick

Monday's surprise announcement that the outlook for U.S. debt has been downgraded reverberated around the world. Global markets shuddered. Investors rubbed their eyes as they re-read the announcement and then hit the "sell" button. Markets declined by 1 to 2 percent. Yet, by the end of the week, stocks and bonds recovered. Was this some kind of false alarm?

First the facts: the Standard & Poor's Rating Services Inc.(S&P) has reduced the outlook for U.S. debt from "stable" to "negative." It did not change its AAA rating for U.S. federal debt nor does it plan to do so anytime in the near future. But it is potentially the first step in an actual ratings downgrade. The White House had been given advance warning last Friday. Officials tried to forestall the credit agency's actions but S&P is convinced that our high debt and deficit levels are raising the possibility that the U.S. fiscal situation could become "meaningfully weaker" if the government fails to improve the country's financial health.

A barrage of spin doctors, led by Treasury Secretary Timothy Geithner, was launched on the nation's airwaves this week in an effort to assure one and all that there is no cause for alarm. It reminded me of that scene in "The Wizard of Oz" in which Toto pulls the curtain away from the Wizard revealing his fire- breathing, smoke-making, image projection machine.

"Pay no attention to that man behind the curtain," the Wizard bellows through his loud speaker system. But like Dorothy, we Americans should ignore the Wizards advice whether in Oz, or in this case, Washington.

The change in the ratings outlook, like a warning shot across the nation's bow, says to me that unless we get our house in order, and do so quickly, there will be hell to pay.

S&P recognizes that all the grand standing going on right now between the political parties is just that. They have no intention of do anything about the deficit until after the next election. Both sides are simply jockeying for position. They are using the deficit to put their presidential candidate and party in the best position to capture the election which is still two years away.

S&P's base case assumes $4 trillion to $5 trillion in deficit reduction would need to occur over the next 10 to 12 years, but it also insists that there needs to be a concrete plan in places for deficit cutting that is actually implemented by 2013. That implies a spending decline of at least 20% of U.S. GDP and an agreement prior to the next presidential elections.

What's at stake here is another Black Swan event, in my opinion. If the politicians flub this one, and our credit rating is cut, I suspect the greenback will be worth about half of its value today. Interest rates across the board in the United States will skyrocket. That will pretty much gut any hopes of a continued economic recovery and the unemployment rate, well, you get the picture.

You might wonder, therefore, why the politicians are stalling since they know the consequences as well as you and me. Taxes, a cut in spending, this year's budget, the debt ceiling – everything appears to be a political football. Politicians blithely fiddle while Rome burns because they all know the truth behind the nation's books.

Historically, politicians and their parties have very little to do with balancing the nation's budget. The most important single variable, when it comes to reducing the deficit, balancing the budget, or actually enjoying a surplus is economic growth. The stronger and longer the period of economic growth, the faster the deficit is reduced. The problem in this recovery is that due to its nature, the U.S. recovery has been anemic and therefore revenues (taxes) aren't coming in fast enough to reduce the deficit as it has in prior economic cycles.

This time around, a combination of growth and spending cuts are called for but politicians on both sides of the aisle are notorious for kicking that particular can down the corridor. The S&P is warning them that the "the can stops here."

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

0 Comments
Tags: ratings, debt, markets      

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Williamstown Theatre Festival Cancels On-Stage Season in Berkshires
Caring for Those Who Provide Care: Frontline Workers Receive, Need Support
Miss Hall's School Head's List and Honor Roll
Williams College Senior Wins Watson Fellowship
CARES Act Offers Help for Investors, Small Businesses
Berkshire Regional Planning Commission Responds to COVID-19 Crisis
MCLA Moves Students Online But Still Plans Commencement
Governor Announces COVID-19 Relief Fund, Testing Facility for WMass
Bennington Hospital Adds Beds, Infrastructure to Prepare for Surge
Belltower Records Doors May Be Shut But The Music Is Still On

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



Categories:
@theMarket (324)
Independent Investor (439)
Archives:
April 2020 (2)
April 2019 (5)
March 2020 (5)
February 2020 (7)
January 2020 (10)
December 2019 (7)
November 2019 (8)
October 2019 (9)
September 2019 (7)
August 2019 (5)
July 2019 (5)
June 2019 (8)
May 2019 (10)
Tags:
Debt Currency Oil Japan Rally Crisis Recession Stock Market Greece Banks Debt Ceiling Interest Rates Markets Election Housing Retirement Pullback Wall Street Fiscal Cliff Economy Deficit Europe Stocks Congress Federal Reserve Commodities Stimulus Metals Taxes Europe Euro Bailout Jobs Energy Selloff
Popular Entries:
The Independent Investor: Don't Fight the Fed
@theMarket: QE II Supports the Markets
The Independent Investor: Understanding the Foreclosure Scandal
@theMarket: Markets Are Going Higher
The Independent Investor: Does Cash Mean Currencies?
The Independent Investor: General Motors — Back to the Future
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: How Will Wall Street II Play on Main Street?
The Independent Investor: Why Are Interest Rates Rising?
The Independent Investor: Will the Municipal Bond Massacre Continue?
Recent Entries:
@theMarket: Don't Trade This Market
The Independent Investor: How the CARE Act Changes Tax-Deferred Account Rules
The Independent Investor: An Economic Game Plan
The Independent Investor: An Old Dog Learns New Tricks
The Independent Investor: Chances of a 2020 Recession Have Just Sky-Rocketed
@theMarket: The COVID Crash of 2020
The Independent Investor: The Biden Bounce
@theMarket: Pandemic Fears Decimate Markets
The Independent Investor: Can America Afford Sanders' promises?
@theMarket: Corvid-19 Impact Coming Home to Roost