Friday, August 5, 2011

Charting the USA's AAA Credit Rating

August 5, 2011
S&P downgrades US credit rating from AAA

The credit rating agency on Friday lowered the nation's AAA rating for the first time since granting it in 1917.

I'm supplying the chart for those who predict the future using economic data from 1871. You may wish to update your long-term economic models.

April 12, 2001
Economic Scene; A history lesson: Don't count on stocks to lead the way out of a downturn.

Mr. Siegel's basic finding was that over every 30-year period since 1871, stocks produced a handsome return that was invariably greater than the return earned by investing in bonds, and over 20-year periods, stocks outperformed bonds better than 9 of 10 times.

But the Yale economist Robert Shiller, who wrote ''Irrational Exuberance'' (Princeton, 2000) even warns that a 20- or 30-year holding period is not necessarily risk free.

''This was the most economically successful century for the most economically successful nation of all time,'' he says. ''It will not necessarily repeat itself.''

Here's one reason it might not repeat. Just a hunch.

August 6, 2011
Australia lost, recovered AAA rating

S&P cut Japan's AAA rating in 2001, and since then the debt-ridden country has descended to AA-.

If only there was a chart to show how Japan's stock market has done since 2001 and some information on what their current interest rates are.


dearieme said...

"More recently, three European countries were in the AAA club before being booted out: Ireland from 2001 to 2009, Iceland from 2005 to 2008 and Spain from 2003 to 2010." I suppose that the UK may also be relegated, but I expect The Great French Bookkeeping Fraud to prosper a while longer. It is a fraud, isn't it?

mab said...

The investment world has gone from underpricing risk to overpricing it. This change has not been
minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that
yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free
governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms. When the
financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the
housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost
equally extraordinary.

Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a
terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable –
in fact, almost smug – in following this policy as financial turmoil has mounted. They regard their judgment
confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning
close to nothing and will surely find its purchasing power eroded over time.
Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it
sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier.
Beware the investment activity that produces applause; the great moves are usually greeted by yawns.
- Warren Buffett

As I keep saying, Buffett, Gross, Siegel and a shed load of others should take a good hard look at Japan. This ain't our father's eCONomy. Not by a long shot. And it's not just he amount of debt either. The knowledge of stewardship has been lost. Financial criminals are now in charge.

Stagflationary Mark said...


Here's one of the best French Jokes.

It's both a defensive line AND a punch line. How cool is that?

Military experts extolled the Maginot Line as a work of genius, believing it would prevent any further invasions from the east (notably, from Germany). However, the German army in World War II largely bypassed the Maginot Line by invading through the Ardennes forest and via the Low countries, completely sweeping by the Line and conquering France in days. As such, the Maginot Line has come to mean a strategy or object that people put hope into but fails miserably. It is also the best known symbol of the adage that "generals always fight the last war, especially if they have won it".

Stagflationary Mark said...


Buffett does not have a good track record when it comes to inflation and has said so quite a few times. (It's not like he backed up the truck on treasuries when they yielded 10% or more in the late 1970s and early 1980s). That's forgivable to me.

What I really don't get though is that someone can be very bullish on stocks while simultaneously being very bearish on treasuries.

It's our debt that is propping everything else up. If one truly believes that interest rates are heading way up, then how can one say that stocks are underpriced right now? Was the 1970s such a great period for stocks?

And if interest rates don't rise from these levels, then yields will stay low. If that was such a great environment for stocks, then how can one explain Japan?

I am mostly an inflation agnostic. I could see it go either way over the long-term. I am not a real yield bull though. I think real yields will stay low as global growth dwindles. I have thought and continue to think that it will be harder to make money off of money (like the 1970s and like Japan).

mab said...


I think Buffett is a phony. a bailout queen and a hypocrite. Even worse, he ignores the root of the problem (Government sanctioned credit fraud!) and then prattles on about how bright America's future is. Exactly how are Americans going to have a bright future when the rule of law isn't applied to financial criminals?

Buffett keeps recommending stocks yet if you look at his annual reports, even he's not making money in publicly traded stocks. For the large holdings that are listed in the annual report (> $1 billion) Buffett hasn't made squat except for AXP, KO and P&G - and all of those gains are from decades ago! And absent bailouts, Buffett's AXP & WFC holding would have been particularly old yellered.

"Suck it up and cope!" - Charlie Munger. Unbelievable.

This ain't Howard Buffett's (Warren's daddy) eCONomy. Not by a long shot.

Stagflationary Mark said...


Buffett says that we'd be better off if credit cards did not exist yet he seems lo love investing in credit cards.

I felt the same way until 2004. Shame on me too perhaps. Seriously.

Although Citigroup was a top holding, I no longer felt credit cards were a good investment. I adapted to the new reality (by panicking early). I got lucky. I should have seen how dangerous the investment was when I first bought. The Kool-Aid was just so delicious though.

I'm growing more and more skeptical about a great many economic "truths" these days. It would seem that I've permanently lost my faith. The Kool-Aid continues to flow though, in exponentially increasing quantities. Hey, at least all the trends aren't dying. Sigh.

mab said...


I am not a real yield bull though.

I'm with you on that. It's not like we allow markets to set interest rates.

I am mostly an inflation agnostic.

We have a slight difference here, but it probably doesn't change the big picture - a dismal eCONomic future.

First, I include house in my inflation mix. Second, I just don't see how the current system will allow debts to be "inflated away".

In broad strokes, inflation would require a pick up in private or public money creation. Forget the private side, that's a deleveraging story for years to come imo. And public borrowing has politically CONstraining headwinds not to mention a financial sector that doesn't want the public to come to understand that Govt's can indeed create money - and not just for bailouts and welfare.

I see Japan, but I don't have a crystal ball. The Fed won't allow deflation but with a private deleveraging taking place that portends a much higher public debt. People will complain about increasing Gov't debt levels, but I think they're inevitable as are low interest rates.

p.s. If I thought we'd have high inflation going forward, I would agree with Buffett's bullishness on stocks. I just don't see the inflation.

Stagflationary Mark said...


We have a slight difference here, but it probably doesn't change the big picture - a dismal eCONomic future.

It really is slight. You think it will be deflation. I simply remain unconvinced one way or another. I'd be pure deflationist more than likely if not for our massive trade deficit.

Look at it this way.

If you were a long-term deflationist then you would have had no problem buying long-term nominal treasuries in 2000.

If I was a long-term stagflationist then I would have had no problem buying long-term inflation protected treasuries in 2000.

Using only hindsight, we both would have done about the same. The winning bet was actually just betting on a stagnant economy (and therefore lower real yields).

Further, I did not buy TIPS because I was a stagflationist in 2000. I bought them because I was an inflation agnostic and I saw inflation protection as insurance. It wasn't because I thought I would necessarily outperform treasuries without inflation protection.

I'm also a fire agnostic when it comes to my house. I don't think it will burn but I buy the insurance just the same.

I go through this a lot. People assume (not necessarily you) that I buy TIPS because I am sure inflation is coming. I don't. As I have said in the past, TIPS do worse as inflation rises (due to the taxation of the gains).

I can sit in TIPS and root for the lack of inflation. A Japan situation would be ideal for me (not our country clearly). I'd have some real yield and virtually no taxation. I think it is a very "real" possibility.

I am amazed about all this talk of rising interest rates as interest rates fall. This is a very deflationary month so far.

I predicted rates would fall after the debt downgrade. I showed historical evidence that it would. I pointed to Japan's downgrades. I don't know what else there is to say.

As a society, we're dwelling on the wrong things. It's the lack of growth in GDP and employment that we should be talking about.

mab said...


I took your reasoning on the insurance aspects of TIPS to heart. Spot on imo!

And I'm not an absolutist when it comes to deflation. I think the Fed & Gov't will act to prevent it. I just see deflation as the primary backdrop given the enormous levels of fraudulent, counter-productive and usurious private debt. And politically, people are terrified of public debt, but in this case for the wrong reasons.

I predicted rates would fall after the debt downgrade. I showed historical evidence that it would. I pointed to Japan's downgrades. I don't know what else there is to say.

On this we've been in complete agreement. The only thing I can add is that the downgrade adds fodder to those that think we should "pay off" the national debt.

I think any reduction of public debt at this point would give Denninger and Mish their wishes - a full blown Fisher style deflationary rout. The only thing propping up all this private ponzi debt imo is Gov't spending. And I think today's stock market meltdown is a recognition of the coming austerity.

I'd prefer a slow bleed or a managed deflation over a crash (and I'm almost 100% in Treasuries!). Unlike Mish and Denninger, I'm not sure we could put humpty dumpty back together again after a collapse.

We never should have allowed Wall St. to create this ponzi debt pyramid. What a mess.

Stagflationary Mark said...


I agree with you.

I think your reply fully explains the seeming contradiction that the USA can lose its AAA credit rating AND interest rates can fall.

It is also something I have believed and why I was willing to lock in rates on 30-year TIPS earlier this year.

I don't see much if any upside in these bonds now at these prices, but I also don't see that much downside either. Long-term real yields are basically tracking long-term real GDP growth (and possible estimates of future growth). I think long-term TIPS are therefore fairly reasonably priced (based on the new long-term real GDP growth I expect, or lack thereof). It's just an opinion of course.

Even if things fall completely apart, it doesn't necessarily mean that real yields will rise. Inflationary World War II, the inflationary 1970s, and the last decade all share one thing in common. Low real yields can shaft short-term savers over the long-term.