Despite hand-wringing and forecasts of gloom and doom from politicians wanting to blame one another for the downgrading of America’s heretofore stellar credit rating, all is well in Whoville….for the time being. Yes, four full months after Standard & Poor’s stripped the U.S. of its AAA credit rating and said the world’s biggest economy was no longer the safest of borrowers, dollar- denominated financial assets are still steadily appreciating.
Government bonds have returned 4.4 percent, the dollar has gained 8.6 percent relative to a basket of currencies, and the S&P 500 Index of stocks has rallied 1.7 percent since the U.S. was cut to AA+ from AAA on Aug. 5. The cost for the nation to borrow has fallen to record lows since S&P said the U.S. was no longer risk-free. To top it all off, the average monthly yield for November on 10-year notes was below 2 percent for the first time since 1950.
Demand for American assets is increasing as consumer confidence, manufacturing and employment show the U.S. is strengthening as Europe struggles to save its currency union and the developed world weakens. U.S. gross domestic product will expand at least 2 percent next year, compared with 1.55 percent for the Group of 10 nations, Bloomberg surveys of economists show.
Hiromasa Nakamura, a bond investor in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of about $42 billion said on December 12 that, “The U.S. is our favorite market.”. “The level of debt is high but I think they will deal with it,” he said. “Financial dislocations are continuing and investor money is flowing to the reserve currency, the U.S. dollar.”
Currency Advantage: The U.S.
When it lowered the U.S. rating, S&P, the world’s largest provider of credit analysis, said the failure up to then of Democrats and Republicans to agree on budget cuts made the U.S. less creditworthy. S&P was downplaying the country’s ability — unlike individual European nations — to print as much money as it needs to pay its debts. Congress cleared a $1 trillion spending bill on Dec. 17 that lawmakers called a bipartisan compromise.
“It is the ability to print one’s own currency to pay government bond investors back under any circumstances that makes a government bond a government bond, i.e. a (credit) risk- free asset for hold-to-maturity investors,” Elga Bartsch, the chief European economist at Morgan Stanley in London, said in a report this month to clients.
Investors have looked past S&P’s warning even as government borrowing surpasses $15 trillion for the first time and the budget deficit exceeds $1 trillion for a third year.
Best Bonds: The U.S.
Long-term Treasuries are the best performing government bonds in the world this year, returning 30 percent, according to Bloomberg/EFFAS indexes. Even as the MSCI All Country World Index fell 5.7 percent in the same period, the S&P 500 itself has gained since the downgrade.
Investors are also showing no reluctance to lend to the U.S. Investors have bid a record $3.02 for each dollar of the $1.96 trillion of Treasury notes and bonds sold this year, according to data compiled by Bloomberg. That’s up from $2.56 in 2007 when the U.S. issued $581 billion in notes and bonds, government data show.
“Treasuries are clearly the safest asset in the world, they will continue to be the safest asset in the world,” James Staley, chief executive officer of JPMorgan Chase & Co.’s investment-banking unit, said today on Bloomberg Television’s “InsideTrack” with Erik Schatzker. “A downgrade in and of itself doesn’t really change the equation.”
Foreigners increased holdings of Treasuries by $17.2 billion in August, September and October to $4.66 trillion, the latest government data show. Non-U.S. buyers own about 48 percent of U.S. marketable debt, up from 34 percent when the nation had a budget surplus in December 2000.
U.S. economic indicators have improved since S&P’s downgrade, with consumer confidence, as measured by the Thomson Reuters/University of Michigan preliminary index, rising to a six-month high in December.
Inflation was little changed in November and manufacturing expanded at the fastest pace in five months, according to the Institute for Supply Management’s factory index. Private employment rose 206,000 last month, the strongest increase this year, ADP Employer Services said.
The U.S. received its highest rating from international investors in more than two years, with 41 percent saying in a Bloomberg poll conducted Dec. 5-6 that the country would be among top performers in 2012.
“We don’t have to worry so much about our government becoming dysfunctional as we have to worry about that damn printing press becoming dysfunctional,” billionaire Warren Buffett, Berkshire Hathaway Inc.’s chairman and chief executive officer, said on Aug. 16 in a television interview with Charlie Rose. “There are 17 countries in Europe that gave up the right to print money, and believe me they know what it means to give up the right to print money.”
Buffett, the biggest shareholder of S&P rival Moody’s Corp., said after the S&P downgrade that the U.S. should be “quadruple-A.” John Bellows, then the acting assistant Treasury secretary for economic policy, said S&P made a $2 trillion “mistake” in its math and then changed the rationale for its decision to politics. S&P denied it made an error or altered its reasoning.
“The U.S. is still the place to park assets,” Scott Kimball, who manages $7 billion of bonds at Taplin Canida & Habacht LLC in Miami, said Dec. 7 in New York. “It is still the strongest credit in the global financial markets.”
All of this being said, the fly in the ointment remains in the hands of countries and circumstances over which we have absolutely no control.
Politics aside, China is dealing with its own housing bubble, daily riots, a more demanding work force that wants bigger and better for themselves and their families.
Europe struggles with a means of controlling a common currency among countries that have disparate fiscal policies, creating very unhappy citizens almost everywhere.
And now, even as Syria and Iran beckon with rising tensions and Egypt experiencing growing pains of a new-born Democracy, the Middle East is once again becoming a concern for the U.S.
Any or all of these uncontrollable circumstances could bring world events crashing down upon our fragile, excruciatingly slow crawl towards economic recovery to a screeching halt.
But with any luck, maybe we can get through the upcoming holidays without a major economic or environmental catastrophy…..maybe.