US Debt Downgrade and What It means for Your $$

Downgrading Your $$


On Friday, the S + P downgraded US Debt a notch, from the top rating of AAA to AA+ ... Let's examine what that means, and why it is important.
So a rating agency, which was unable to predict the 2008 financial crisis, says USA just slightly slightly riskier than before ...
None other than Warren Buffet retorted in an interview with Fox News shortly after the downgrade, stating that S+P is dead wrong, that he would give the US a quadruple A rating if there were a rating above 3 A's ...
I plan to commit investor sacrilege and challenge The Oracle of Omaha (Buffet) here as well.

First of all what does it really mean, the "downgrade?" In real terms, not much. Buffet is absolutely correct when he says there is little chance at a "default."

** But Rich! You said you were going to challenge Buffet. Now you agree with him?**

Did you notice that I put "default" in quotes. Yes, the US has a printing press, and they can easily print more money and pay off everybody, "hooray!"  (note the quotes)
But then the real value of the money they are paying investors/lenders is decreased drastically. Look, the only reason someone is considered 'rich/wealthy' is because others have less money than them. If you have 5 million dollars, and everybody else in the world has 500 dollars, are you rich? Damn straight! But if suddenly I, the US Government, decide to print five trillion dollars, and decide to hand out 5 million to all your neighbors, are you wealthy any longer? NO, because while you still have 5 million dollars, all your neighbors are bidding on the same goods and services offered, and have driven the prices up. So what cost let's say 100 dollars before, now costs $100,000 ... You ain't rich no more buddy boy.
(It reminds me in the movie Austin Powers, when Dr. Evil, who has been asleep for twenty years, threatens to blow up the world, pauses ominously, raises his pinkie finger to the corner of his lips, and demands "1 million dollars" and everybody laughs at him. 1 million ain't what it used to be.)

Another word for it is INFLATION. So the real value of the money that the USA is actually paying to bond holders after printing money is less than the original value of money that was given to them. While technically not a "default," in reality, it is a form of defaulting.

Look, the US Government has been borrowing borrowing borrowing money for years. Now they were just hours away from a technical default, before making a deal to kick the debt can down the road a couple years. (talk about political leaders making the hard decisions and acting decisively) ... A few hours away from what was the beacon of certainty for the rest of the world, the place of dreams, the world's leader, from defaulting on debt, and the Obama Administration is mad that government debt was downgraded One notch?
Are you kidding?

So look at the results (which I successfully predicted in my last post (The US Debt Crisis and Your Money)  http://www.cnbc.com/id/44044859/
China has announced the good old days of the US borrowing its way out of messes, is "over." To me, I interpret their words to be a shot over the bow of the ship saying, "Since you idiots can't seem to cut spending or raise taxes, you had better not dare start printing money and erode the value of our 2 trillion dollar funding of your debt. Find a solution cause if you start printing, we aren't giving you irresponsible children more money."

So, what does this mean for your money and why, back to the original point about the debt crisis-- does this matter for you?
1) In an already psychologically damaged market (the 500+ point drop on Thursday--  remember who told you to raise cash which I did for my clients) this will create further selling pressure.
The price of a stock is largely a graph of the psychology of the general investing public rather than the underlying fundamentals of the company. This is why there are such things as bubbles, stock, .com, housing, tulips ... people are irrational. I am predicting a big sell off on Monday, and a further 20% drop in the DOW over the coming months. This is largely psychological and herd mentality.

2) The fundamentals have now changed. We are currently at record low interest rates, they have nowhere to go but up. China will start demanding higher rates of interest to fund our debt. Guess what that does to adjustable rate car loans and mortgages. Does the consumer now have money to spend paying more of their income in higher rates? Less obviously. And can I, the local business, afford to pay for more workers or fewer with less revenue coming in. Sorry guy, gotta let you go. Now my former eployee has less (no money) to pay for goods and services. A very negative cycle comes into play here.
This has the possibility to be like the stagflation which plagued the US economy in the 1970's during which US Equities suffered terribly.

Look, I am going to discuss tomorrow how the US got to this state, and why, but to put in shorthand, we are getting our comeuppance. This is going to be an economic winter for the US. I hope I am wrong.
I was just in the Ukraine two days ago, they have very very little of any sort of social safety net, You work or you don't have food on the table. and you work HARD for $600 a month. People have little faith (for good reason) in Ukranian politics and currency, so the government is forced to peg their currency to the US Dollar. yet, the citizens of the US feel entitled to huge houses, big cars, etc, while most Ukranians would barely be able to dream of owning an SUV ...
And for a long time there were very good reasons that Americans could work the same number of hours as the rest of the world and have so much more for the same efforts (which again i will discuss very soon) The truth is, the US was the heavyweight boxing champion of the world, but has gotten enormously fat and lazy (as demonstrated in physical form by many of its citizens) and now the rest of the world is catching up, and the champ just might go down from an uppercut from China.

Life ain't going to be the same in the US.

The verdict: Watch for a big sell-off on Monday. Watch for DOW 10,000 soon enough. Market psychology worsens profoundly.
Eventually we will get to vastly oversold territory, then you can consider buying back into the really great companies like Google (which I obviously love as an innovative company) and going from there.
also, you might want to protect your cash by buying currency that is not intertwined with the US. the Singaporean dollar maybe ...

And my last words: I hope that I am wrong.

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