AAA-rating Not Safe?

by Larry Levin

This morning the credit rating agencies tried to pretend that they are still relevant - that anything they say matters - that they are not woefully behind credit downgrades in 100% of all cases. In essence Moody's said, "If the major players in the world, including the U.S.A. and U.K., do not get their financial houses in order, we will take them down a peg...a WHOLE PEG."

Moody's makes the case that the global economic recovery remains "fragile" in several large, advanced economies, most of which have also implemented the most aggressively expansionary fiscal and monetary policies, which is not a good thing in the long run. I guess the folks at Moody's aren't die-hard believers in the Keyensian miracle. "This exposes governments to substantial execution risk in the implementation of their exit strategies, which could yet make their credit more vulnerable," Arnaud Mares, senior vice president in Moody's Sovereign Risk Group and the main author of the report, said in a statement.

But don't worry folks, this rating agency and the others all believe that "debt affordability," which is the ratio of interest payments to government revenues, indicates that the ratings of all AAA governments remain well positioned. Uh-huh, as long as you believe the government accounting.

What Moody's, S&P, and Fitch count are only what the government has on its books as liabilities, which are currently about $12.6 trillion - and anyone can handle interest payments on $12.6 TRILLION so lets move along. Because the GDP of the US is currently about $14 trillion in the current recession (was over $15 trillion) the debt-to-GDP ratio is about 90%. You would never get a loan with a debt-to-income ratio like this, but it's all about "going along to get along" when it comes to Sovereign nations. In other words, lower standards apply so that they can keep kicking the can of reality further down the road.

The reality is FAR WORSE than the government says; it never includes future Medicare, Medicare Part-D drug benefits, future Social Security, future Medicaid, or unfunded federal pension liabilities. When this is included, the total government debt is a staggering $107.8 TRILLION. By the time you read this it will surely be north of $108,000,000,000,000.00! See for yourself at www.usdebtclock.org/

As an aside, the prior goofball inhabitant of the White House gave us massive war spending and unfunded Medicare Part-D drug giveaways. The current goofball promises to DOUBLE the current debt and saddle the nation with massive new entitlements...to fix it. What!? Is "stuck-on-stupid" the only one running for office?

Many of you may be wondering why the government keeps an illegal extra set of accounting books? Well, its illegal for everyone else...and the banks. Only the banks and the government are allowed to keep "off balance sheet" liabilities from your purview. I'll never forget the answer I heard on television when someone finally asked that very question to a Congressman and his answer made sense - sort of.

His reply was (loosely quoted) "We will never count those liabilities as future debt because at any moment Congress can pass a law to make it go away." True enough, which is why it makes sense.

But can they really? Can you imagine a Bill that makes the following the law of the land...
1) "With this law NOBODY working for the federal government will receive a pension."
2) "With this law NOBODY will receive Medicare Part-D drug benefits."
3) "With this law Medicare benefits will cease today."
4) "With this law NOBODY will be receiving Social Security payments. Good luck in the stock market."
5) "With this law, the USA will divert all of these funds to the governments of its largest debt holders - China and Japan."

What are the odds of this happening? I'd say they are exactly ZERO. And since the odds of this happening are ZERO, then indeed the government carries a crushing and legitimate $108 trillion (and rapidly rising) debt level, which makes the aforementioned "debt affordability" ratio laughable. Moreover, the debt rating agencies know this to be true, which makes them lapdogs of the government, irrelevant, and laughable.

The real so-called "debt affordability" ratio is somewhere near 770%.

So what would happen if the ratings agencies tried to remove some of the tarnish from their reputations and actually lowered the AAA-ratings of the USA, UK, France, and Germany? I think it's obvious: the mantra will be that "all is well" because there is a "new normal" - AA is the new AAA - so all is fine. Investments that REQUIRE ratings of AAA will have their covenants rewritten to allow the purchase of whatever the new standard is.

In the end it will reveal that the insanity of today's debt levels make no difference to anyone in a position of power, which should equate money to what it really is: paper with ink on it - worthless.

Of course, none of this has to happen. The government will probably take the easy road and threaten/cajole the ratings agencies with their future IRS problems and poof - no more talk of potential downgrades.

Pay no attention to the debt-elephant in the middle of the room; it's not really there.



Previous Day's Trading Room Results:

Trade Date: 3/15/10

E-Mini S&P Trades*
(before fees and commissions):


1) FT sell at 12:57am @ 1140.75 = +.75, +1.50, +1.50 (3 lot)

3) Algorithm positions (6)

4) "Reading the Tape" positions (2) ...combined Secret's, Algo, & "Reading the Tape" total...+8.00



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