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S&P's US Downgrade Didn't Surprise Astute Investors

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Tuesday, 09 Aug 2011 07:50 AM Current | Bio | Archive

Let’s make one thing clear: The United States lost its AAA credit rating well before S&P’s surprise downgrade Friday night.

China’s premiere ratings agency downgraded US debt long ago. When speaking to Chinese students in 2009, Treasury Secretary Tim Geithner got some laughs when he said that US Treasurys were safe assets.

A few other small ratings agencies have followed suit since the Chinese downgrade. While S&P is the first “major” ratings agency, it’s no surprise that it’s behind the ball.

Like the other big-name ratings agencies, S&P completely missed the dangers of securitized mortgages. It over-rated poorly constructed housing debt, also giving it a coveted AAA rating.

Looking back on the housing crisis, we know it was a bit silly to give a high rating on a $750,000 house owned by a strawberry picker making less than $20,000 per year. In a few years, perhaps most investors will wonder why they stuck with Treasurys for so long.

While the big ratings agencies have the tendency to give bad debt good credit ratings, S&P’s move to downgrade American debt could be followed by others.

Observant investors have already noted that an investment in Treasurys has offered paltry yields, well below the rate of inflation as measured by such basics as food and gas prices. On some short-term Treasurys, investors have had to pay a negative interest rate, effectively paying the government for the privilege of owning their bonds.

It’s also notable that gold has hit new highs, during a period that’s widely regarded as seasonally weak. That’s because most traders take the summer off, and prices tend to pick up in the fall as India’s wedding season drives demand for gold bullion.

Gold, and to a lesser extent silver, will also work well. The S&P downgrade may spark a fear in short-term paper. A crisis in the Eurozone may also drive international fear in currencies as well. At today’s ultra-low yields, investors aren’t missing anything by owning physical bullion.

Although the loss of our AAA rating is somewhat recent, we started going down the wrong path years ago. Whether it was TARP, the bailouts, or two rounds of quantitative easing, at some point America’s fiscal policy went wildly off course.

Whether or not we want an AAA rating in the future isn’t important for today’s investors. The best course of action is to take advantage of any short-term selloff and invest in quality companies that can pay a solid and increasing dividend. Examples would include Procter and Gamble (PG), Johnson and Johnson (JNJ) and Coca-Cola (KO). Any of these companies offer better yields than Treasurys, increasing payouts, and dividends backed from producing real products.

Investors who still prefer fixed income instead of stocks should look toward Asia for income opportunities. Asian government bonds offer higher yields than the US, and their countries are in much better fiscal condition.

If you’re holding any Treasurys, don’t panic. Just get into a higher-quality investment.

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AndrewPacker
Let s make one thing clear: The United States lost its AAA credit rating well before S P s surprise downgrade Friday night. China s premiere ratings agency downgraded US debt long ago. When speaking to Chinese students in 2009, Treasury Secretary Tim Geithner got some...
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Tuesday, 09 Aug 2011 07:50 AM
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