Friday, May 22, 2009

Is Uncle Sam Creditworthy?

This is a somewhat difficult question to answer, as it is questionable whether any truly objective means of evaluating the creditworthiness of an individual/corporation/nation even exists. However, given that the investment community tends to rely upon a letter based rating system, developed and implemented by a small group of "ratings agencies", we will comment on Uncle Sam from this pseudo-objective standpoint.

Many of the inquisitive minds who frequent this site will remember a declaration that we made on March 19, 2009 in a post entitled The Fed Follows Suit ,forecasting the eventual loss of the United States Government's AAA credit rating. At the time, we were lambasted as a bit "out in left field" for making such a preposterous prognostication. Now however, the idea is starting to gain traction, and has even managed to "earn" a bit of discussion time on the popular stock market "investment" shows. As usual though, the producers of these programs either lack the will or the ability to deliver any content other than the latest pre-packaged storyline from Wall Street.

This story in general began gaining traction yesterday, when the US's feeble associate, the United Kingdom, was warned by Standard & Poor's about the country's ever growing public debt as a percentage of GDP, and put on alert that a AAA rating is a privilege earned, not a right given at birth(or in Britain's case, through conquest). Instead of diverting attention away from Uncle Sam, this announcement served to increase investor scrutiny concerning, to put it simply, just what kind of ship is the US running?

The future of the US's AAA credit rating is quite uncertain, however, we would be willing to speculate, in general terms, just how we see this all "going down". The situation in the coming months, we think, will be quite analogous to that of General Electric-another American entity that had likely come to take its AAA rating for granted. As most of you remember, GE was stripped of its AAA rating by all three agencies quite recently. The official downgrade announcement however, came absent any sort of fanfare, panic, or surprise. The reason: The Market told us all about the looming downgrade long before the ratings agencies did. Similarly, as evidenced by the steadily increasing yield on the 10 year Treasury note, The Market is clearly beginning to question the vaunted AAA rating of the United States of America. The signalling process is in its very early stages however, and a change of course by Washington could still prevent the embarassment of a downgrade. Unfortunately, the sort of ideology/principles that would be necessary to effectuate this change of course are notably absent in both of the major political parties that operate in Washington.  
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