Monday, April 18, 2011

Why smart investors ignore the ratings agencies

Today we discover that the outlook for the U.S. economy has suddenly deteriorated, according to the analysts at Standard & Poor's:

"Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," the agency said in a statement.
If large U.S. budget deficits and rising government indebtedness are news to you, then you shouldn't be making investment decisions. A smart investor doesn't need to wait for S&P to figure out that the U.S. government has a huge problem—that problem has been obvious for at least the past two years. What is amazing is that the market today had a negative reaction to the S&P announcement of the obvious. That sounds like a buying opportunity to me.

Ratings agencies rarely are the first to uncover important changes to the fundamentals behind a security or a country. More often than not, they are the last ones to figure out what is going on. Smart investors need to understand and react to changing fundamentals long before they are revealed in a rating agency press release. Ratings agencies cannot pay enough to hire staff smart enough to routinely beat the market.

The irony of today's announcement is that we are not on the cusp of some new and serious deterioration in the fiscal fundamentals of the U.S. economy. On the contrary, we are now on the cusp of what could prove to be a new and very positive trend in the fiscal fundamentals. For the first time in many years, Congress seems finally aware that it must make some serious attempt to cut spending. If the analysts at S&P were on top of their game, they would have upgraded the outlook for the U.S. today.

16 comments:

Benjamin said...

Excellent post by Scott Grannis.

The nerve of those sanctimonious twits at S&P, who take money to give favorable credit ratings to any piece of paper with a smudge on it, but now imperiously pronounce the United States may be less than credit worthy.

What'sa matter S&P, is this payback time for legislation that may limit your gravy train? That is, somehow end this eternal charade by which issuers pay credit rating agencies for the "investment grade" mark they need?

And let us see, S&P. you did warn us about the RMBS collapse, when?

Still, the USA needs to put debt reduction higher on the front burner. National security, some entitlements just have to take the a back seat for a while.

Lori said...

Agreed, Benjamin, S&P now thinks US Treasuries should be downgraded, but Liar loan mortgages get rated AAA?

These credit rating agencies have to be run by the biggest collection of morans ever assembled in one
place. They are dumber than the idiot running Citibank.

Now, if today's news wasn't catalyst for a gold blowoff I don't know what would be. It should have spiked higher this morning and might make 1500 yet but that's ALL it's gonna do.

Good day to sell. Especially when our fav-o-rite professor was up in here recently suggesting that gold is NOW a buy on worries over inflation.

I predict 992 per ounce by July 4, 2011.

Benjamin said...

Lori-

I am no goldbug, but what is, is. And we have gold fever.

Don't ask me to explain it. No yield, no dividends, lots of risk.

It does not help that fear-mongers and purveyors of doom have the money to buy scary-sounding endless ads on talk radio.

Gold near $1,500 an ounce. Who knows where is the top? Who thought rap music would last longer than a season (not me)?

randy said...

For myself, investing ( or shorting ) gold is like playing poker with sharks. No way I can win. You can read this article about UT endowment buying physical gold to get a sense of the high stakes being played out. The whole gold phenomenon is fascinating – it’s financial value having very little to do with it’s productive value. And notional contracts far exceeding physical availability. Are we going to be bailing out investment banks that were on the wrong side of these deals next?

randy said...

For myself, investing ( or shorting ) gold is like playing poker with sharks. No way I can win. You can read this article about UT endowment buying physical gold to get a sense of the high stakes being played out. The whole gold phenomenon is fascinating – it’s financial value having very little to do with it’s productive value. And notional contracts far exceeding physical availability. Are we going to be bailing out investment banks that were on the wrong side of these deals next?

Jeff said...

Lori,

In 1800 you could buy a nice suit, a pair of dress shoes, a tie, and a shirt for about an ounce of gold ($20).

Today, you can buy a nice suit, a pair of shoes, a ties and a shirt for about an ounce of gold.

In the next 2 years or so, Gold will hit $2000 before it sees 1000. I'll bet you 100 trillion Zimbabwe dollars on it.

Benjamin said...

Jeff-

There are many retailers in Los Angeles that sell suits, shirts, ties etc for far less than $1500.

There is so much slop in that hoary shibboleth I don't know where to start. Quality? Geography? 24k gold? 18k gold?

I will stick to what my grandfather once mused, his fortifying gin in hand and his eyes suggesting decades of remembrance: "All gold is fool's gold."

Lori said...

Jeff,

Do not mine me. I have a different perspective than most. I bought gold and silver in 1999/2000.

As to your example, a better measurement is how many hours did the average person need to work to buy a suit, shirt, shoes, and tie in 1880?

How many hours of labor does the average worker have to work to buy the same today?

My guess? It was much less time now that it was in 1880.

Better yet, I'd guess that the average person circa 1880, did not even wear a suit and tie!

On a second note, in today's times my motto is, never trust a person in a suit and tie.

Jeff said...

I'm retired and I don't wear suits anymore.

I agree, it is probably way less time today to "earn a suit" in labor hours than in 1800s. But that is more a story of capitalism working than socialism failing. We are massively more productive today.

the topic at hand is our government trying to borrow and spend our way to prosperity. ("we need to spend more or we'll go broke" --our veep) At the rate we've been going in the last two years it will once again require many more labor hours to earn a suit once again!!

And you won't be paid in dollars anymore either.

You didn't take my bet.

Lori said...

Jeff,

I will take your bet. Gold hits one grand before $2,000.

One trill, Zim bucks. Or 300 US.

Jeff said...

It's 100 trillion btw, not 1 trillion! But don't worry, I bought them for about $3 per bill. But they're going for $8 or $9 now on ebay.

Look, even the Zimbabwe note is gaining on the US dollar and it's not even an official currency anymore!!

Jeff said...

I should send one of the 100 trill notes to Scott to hold for us. (And an extra one for you Scott. You can hang it on your wall as a reminder of the ultimate fate of fiat currencies.)

Scott Grannis said...

No need. I picked up several of the Zim notes last year on our trip to Africa. I also have a pile of million-peso notes from Argentina. I was there when they were first issued in the late 1970s, and had a value of about $2,000 US. When they went out of circulation about 5 years later they were worth about 25 cents.

Lori said...

I have a book by Ivan Boesky that I purchased out of the remainder bin. It's mint condition, and cost me one dollar. It now sells for $75.

Nothing different than theses Zim notes. Collecter's items only.

Supply and demand, friends. Supply and demand.

Jeff said...

Lori, is there a Ivan Boesky ETF??

Jeff said...

Did Bernie Madoff write any books?? Maybe we should buy them up quick.