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US Could Survive Downgrade: Just Ask Japan

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Wednesday, 27 Jul 2011 02:11 PM Current | Bio | Archive

“What if the U.S. loses its triple-A rating?”

First of all, and again this is my opinion, I have very, very little hope of the United States not losing its triple A rating. I think this could occur probably much sooner than many think.

I think that the actual commotion surrounding the possibility of the U.S. sovereign debt losing its three-letter talisman (AAA) is way overblown and all that ongoing talk of “eligibility” triggers and violations of investment policy guidelines will hardly change the behavior of the actual buyers of U.S. Treasury debt.

Maybe it could be helpful to look for a moment at what happened to Japan when it lost its triple-A rating in 1998. Before that downgrade, Japan paid on average about 4.5 percent on its 10-year debt.

Since 1998, Japan has paid on average 1.5 percent on its 10-year debt. Real yields were 3.1 percent before 1998 and 1.6 percent after losing its AAA rating.

Please don’t misunderstand me because I’m also convinced that higher yields on U.S. debt are coming but they aren’t here yet, that’s a fact.

In the meantime, the dollar hasn’t fallen off that cliff and Treasurys remain well priced while money flows show modest net dollar buying for the moment …

So, things will remain what they are and these old world “uncertainties” won’t provoke an Armageddon in the short run. The U.S. dollar and Treasurys won’t fall off a cliff, at least not for the time being.

What is certainly not headline news for the moment but what worries me much more are the negative warning signs that the U.S. freight industry is giving us.

U.S. West coast container traffic growth rate has plunged from the August 2010 top rate of 26.4 percent to a 17-month low of 3.2 percent.

U.S. intermodal rail traffic as of May-June now stands only 2.5 percent above the same reference period in 2010, hereby demonstrating an extremely sharp deceleration of 26 percent year-over-year compared to that earlier period.

In China, Shenzen port numbers also are contracting and barely remain positive. Shanghai growth numbers have been halved from 18 percent year-over-year growth for the whole of 2010 to a 16-month low of 7.4 percent in June.

Also the IATA (International Air Transport Association) freight numbers showed their first global decline since the crisis, registering a 9.8 percent year-over-year drop in the extremely important Asian-Pacific region, which, by the way, was only exceeded in the September 2008-March 2009 period.

Overall, the shipping industry has recently multiplied its cautious statements, while at the same time several “key” machinery makers like Caterpillar, Atlas Copco, and Siemens have also given us less optimistic messages.

Since we also see various important global PMIs (Purchasing Managers Indexes) in China and Germany declining, we could be entering another period of “stormy weather” once again.

Interestingly, the U.S. PMI for June increased slightly, by 1.8 percentage points to 55.3 percent. That was still well below the plus-60 levels we’ve seen this year until the month of May.

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HansParisis
What if the U.S. loses its triple-A rating? First of all, and again this is my opinion, I have very, very little hope of the United States not losing its triple A rating. I think this could occur probably much sooner than many think. I think that the actual commotion...
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2011-11-27
Wednesday, 27 Jul 2011 02:11 PM
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