Triple-A USA

"If the federal government will step in to help them, they are triple-A. If the federal government won’t step in to help them, who knows what they are.”

-Warren Buffett

 

Yesterday was neither a good day for the Thunder Bay Bears nor the once revered definition of “American Capitalism.” As I am sure US economic historian and author of “Buffett: The Making of An American Capitalist”, Roger Lowenstein, would agree, altogether it was a historical day for finance in this country. Never before has the US portfolio patriarch, Warren Buffett, been forced to answer questions about his market positioning against his own will.

 

If any of us Buffett fans thought the man was going to be forthright and transparent about what it is that the ratings agencies actually do, we should think again. I felt like I was listening to a professional politician when Buffett excused Moody’s by suggesting that they simply “made a mistake that 300 million other Americans made.”

 

We get what Buffett gets – politicians created and perpetuated a ratings system that could be gamed. What Buffett is really doing is playing the game that’s in front of him. Current conflicts, compromises, and constrains aside, his mandate is to make money – not to make you believe how he is making money is “right.”

 

To contextualize Buffett’s aforementioned quote about whether or not the states of America should be rated AAA, let’s take a quick step back and understand where this designated ratings system of Perceived Wisdom comes from.

 

In 1909 a gentleman by the name of John Moody (who is currently rolling in his grave) started selling independent research like Hedgeye’s (he was paid by subscription, not by the issuers of bonds he was rating). Over the course of time, independent research became a profitable business and it, predictably, found competition with firms like Poor’s Publishing.

 

By the time the 1970s rolled around and the USA was newly minted with its endowment of the world’s reserve currency (1971), the SEC “decided to penalize brokers for holding bonds that were less than investment grade. The SEC then faced the question of investment grade according to whom? The agency decided to create a new category of officially designated ratings agencies and grandfathered the big three – S&P, Moody’s, and Fitch.” (Roger Lowenstein, The End of Wall Street, page 39).

 

This, of course, created the kind of business that I, the Saudis, and Warren Buffett love – cartels who have a lock on supply and pricing via government mandate. All you needed to make this the “bubble that none of us saw coming” (Buffett) was more and more government intervention and price supports. Enter Greenspan and some moneys from the heavens and you can all of a sudden see how, from 2002 to 2006, that a conflicted firm like Moody’s saw profits triple and MCO stock go to $74/share.

 

“Given the agencies profits were soaring it paid for them to stay on good terms with Wall Street. Moreover, when Lehman took a mortgage pool to Moody’s, it paid the fee only if it was pleased with the rating.” (Lowenstein, The End of Wall Street, page 41).

 

Sure, even though some of us actually did see this coming… Mr. Buffett, with all due respect, maybe it was because we weren’t being paid to be willfully blind to the problems, in principle, that are obvious here…

 

So, after another great low-volume rally to lower-highs in the US stock market yesterday - fully trusting in the good faith of the USA’s Triple-A rating, we should chase stocks higher here on the open, right? C’mon. Let’s get serious here folks. This time there will be no finger pointing at 300 million Americans. No one will be allowed to say they didn’t see this US Sovereign Debt crisis coming with a straight face.

 

For a preview of what is coming down the pike in terms of US deficit spending and debt obligations, don’t ask Moody’s or Blackrock’s Larry Fink for their forecasts. Just this morning, Fink, who runs a massive asset management business in America’s politically infested waters said that it’s time to “rock n’ roll”…

 

Maybe we should dial up Chucky Prince and have a ourselves a little dance with the Thunder Bay Bear

 

The Fiat Fools in Europe are already providing a play-by-play preview for all Americans who still aren’t being paid to be willfully blind to see. As a reminder, we think the US deficit/debt problems come home to roost within 3-6 months, so it’s critical to analyze the sequence of events that Western European stock markets and populations alike are currently enduring.

 

The road from austerity to the forced selling of sovereign assets leads through the Rubicon of civil unrest…

 

Greece’s deficit-to-GDP ratio isn’t much different than Triple-A USA’s, but their scheduled debt maturities were closer/larger in duration (and they didn’t have in-house Fiat Fools running the world’s reserve currency with moneys dropping from helicopters), so they are going through the ringer first. Here’s a recap of the forced selling side of the game Buffett would recognize as Monopoly in Europe this morning:

  1. Greece – selling 3B Euros ($3.7B) worth of sovereign held stakes in railroads, water utilities, and postal services...
  2. Spain – Cajas Murcia is leading another 4 problem banks to merge approximately 75B Euros ($89B) in assets before the June 30th “rescue” date…
  3. Portugal – parliament approved austerity measures last night (ie. raising taxes and the like)…

“Rock n’ Roll” maybe for professional politicians or someone who recognizes that the art of the money management business is having money to manage… but for the citizenry of socialized nations… this looks more like a sneak preview of the “Road to Perdition” to me.

 

My immediate term support and resistance lines for the SP500 are now 1077 and 1106, respectively. We’d be a seller of all US and European equity strength today, ahead of another ominous reminder that big government employment reports are not too big to fail.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Triple-A USA - Buffett


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