Understanding the mindset of today’s swamp walkers is crucial for grasping how credit rating agencies and temporary financial measures are guiding America toward a concerning outcome.
Recently, Moody’s Investor Service downgraded its U.S. credit outlook from ‘stable’ to ‘negative.’ Despite this shift, the agency retained the U.S. AAA rating, its highest classification. What could be causing this contradiction?
A few months prior, Fitch downgraded the U.S. credit rating from AAA to AA+, and S&P Global Ratings made a downgrade as far back as 2011. Does Moody’s genuinely consider U.S. credit to be exceptionally safe?
Truthfully, the financial health of the U.S. government has significantly deteriorated over the last fifty years. Yet Moody’s continues to evaluate U.S. credit as if the national debt situation remains robust and responsible.
By altering its credit outlook, Moody’s may be paving the way for an eventual downgrade. However, by that time, such a downgrade may be too late for the public to take notice. Clearly, it won’t push Washington to address its spending issues. Continue reading
According to estimates from the Congressional Budget Office, Washington is projected to accumulate an additional $20.2 trillion in debt over the next decade, pushing the total national debt to approximately $54 trillion.
The national debt, resulting from annual budget deficits, is escalating by around $2 trillion annually. Much of this debt is necessary for mandatory expenditures such as Social Security, Medicare, and health care. Additional funds are allocated to discretionary spending, including defense and infrastructure.
Moreover, net interest on this debt has reached over $1 trillion annually, a first in U.S. history. Washington is essentially borrowing to cover the interest on its debts, which is an unsustainable approach for managing a nation.
These projections—showing $2 trillion deficits per year—assume a stable environment. They rely on an annual growth rate of 2.4 percent in real gross domestic product and predict that no new wars, pandemics, or crises—whether intentional or otherwise—will disrupt these budget forecasts. Continue reading
The monumental bond bull market, which lasted from September 1981 to July 2020, saw the yield on the 10-Year Treasury note plummet from 15.32 percent to 0.62 percent. Recently, however, yields have surged, currently hovering around 4.66 percent.
This swift fluctuation in interest rates has created discomfort for bankers, borrowers, and businesses alike. Our view is that this period of discomfort is just beginning.
After nearly four decades of accommodating credit markets, which allowed debts to be continually refinanced at progressively lower rates, there is now significant turmoil that needs addressing. We anticipate a substantial liquidation of asset prices, provided that central planners refrain from intervening.
But, what if the worst upheaval has already occurred?
Could it be that the most severe bond bear market in the 247-year history of the United States is nearing its conclusion? Is this an opportune moment for investors to consider purchasing shares of their preferred companies? Continue reading
The Federal Reserve kept interest rates artificially low from approximately 2008 to 2022. This was achieved by generating $8 trillion in credit to purchase Treasuries and mortgage-backed securities.
This intervention inflated stock, bond, and real estate markets far beyond sustainable levels. Additionally, manipulated interest rates led to rampant speculation.
Speculative bubbles often thrive on expanding credit. A historical look at previous manias reveals a common narrative.
Take the tulip mania in Holland during 1636 and 1637, for instance, which was fueled by personal credit as sellers lacked actual bulbs, yet buyers made down payments with personal possessions. Similarly, the Mississippi Bubble of 1718 to 1720 was inflated by paper notes from John Law’s Banque Générale, later known as Banque Royale. Moreover, the real estate boom from 2003 to 2007 was enabled by low interest rates and credit expansion through mortgage-backed securities. Continue reading
In summary, the current financial landscape presents numerous challenges driven by rising debt and interest rates, alongside persistent uncertainty. As past cycles illustrate, shifts in credit conditions can lead to substantial repercussions. Vigilance will be key as we navigate these turbulent waters.
