US Credit Rating: Who Will be the First to Downgrade?

During World War II, there was a saying, that, “loose lips, sink ships”… I think Greek Prime Minister, George Papandreou, should have taken those words to heart yesterday… You see, the currencies, led by the beleaguered euro (EUR), were rallying, and the single unit was nearing 1.37, when Papandreou made a statement that sunk the rally’s ship… He said, “Greece’s debt problems could soon spread to the rest of Europe and mean a weaker euro”

Now, that’s just what the markets wanted to hear… NOT! The markets were very content believing that Greece’s problems would fade away with a combination of Greek spending cuts, and aid from France and Germany… And you could see the euro shorts beginning to unwind… But… NOOOOOOOOO! The Greek PM sunk the rally’s ship, with his loose lips…

The Greek PM also said, “the Greek crisis has implications for the US dollar” but didn’t elaborate on that point, so the markets took that to mean the implications were good!

So… There you have it… Yesterday’s price action all rolled into a couple of paragraphs…

Overnight… We saw additional dollar strength… And when you see dollar strength, you also see yen (JPY) strength… At least since July of 2008. Safe haven flows… Yeah, right… And my first wife was a young Elizabeth Taylor… Yeah, that’s the ticket! Those “safe haven” flows sure helped shelter investors from losses last year, didn’t they? NOT!

Last night, the ratings agency, FITCH, fired some shots across the bow of the Eurozone… Let’s go the tape! FITCH told Portugal, that it may be downgraded if measures are insufficient, and they told Spain, its macroeconomic risks remain high.

The ratings agency also told Greece that their short outlook is probably OK… Huh?

Then FITCH went a step further and said, “there’s no pressure on the US credit rating in the short/medium-term though the US is vulnerable to interest rate shocks.”

Hmmm… Just last month the rating agency, Moody’s, issued a report that said the US debt problem was going to lead to a credit rating downgrade…

So… What’s it gonna be, boy? FITCH or Moody’s? I would have to think that since FITCH is the latest to come out, that it supersedes the Moody’s report last month… Or… That’s how the markets look at it, anyway!

The “loose lips, sink ships” arrow that was shot at the currency markets yesterday, carried over to the Aussie dollar (AUD), which makes little sense to me, given the rate differential, and the strong economic data that keeps printing in Australia… Last night it was the latest jobs report, which showed that job ads increased 19.1% in Feb, and… A business survey showed improvement in both conditions and confidence. Australia did receive one piece of economic data that is so strange you have to think that a revision will come… I’m talking about Capacity Utilization, which dropped from 82.1% in January to 80.7% in February… The 80.7% is the lowest print of Capacity Utilization since last September… Remember, just like here in the US… Capacity Utilization is about the only “forward looking” piece of data that prints… So… Just taking this report for what it said, one would think that going forward, the Reserve Bank of Australia’s interest rate hikes have begun to settle into the economy, which… Is a good thing, folks… The last thing you want to see in a country where you have money invested is an overheating economy!

Gold got smacked right on the chin yesterday… Just when it appeared that gold’s downtrend had been reversed (as I said last Friday), we get a day like yesterday, when the sellers of the shiny metal came out of the woodwork! Forces are pulling on both sides of gold these days, as there are those that believe gold will fall to $800… And there are those that believe gold will soar to $2,000… Me? I’m not a betting man, except for a shiny quarter, or a dollar to a Krispy Kreme, but I would think that gold slipping in price isn’t out of the question, but to $800? That’s a little extreme, and on the other side of the coin, $2,000 on the upside seems to be a little extreme…

I’m reading a story on the Bloomie this morning that caught my good eye; it’s about yields on Fannie and Freddie mortgage securities. It seems that the Fed’s buying of mortgage bonds to keep yields low, has worked… Unfortunately, that plan will cease to exist at the end of this month… What will mortgage rates do then? The Bloomie story was attempting to paint a picture whereby yields remain low after the Fed plan ends… I’m not buying that! I’m of the opinion, that the Fed might let this plan end, take a look at widening yields, and put it right back in place… But… I guess we’ll have to wait-n-see, eh?

I see where “my idea” of creating a European Monetary Fund (EMF) is gaining traction in Europe… I talked about this yesterday, and the plans to create this EMF began this past weekend. I had talked about the need for something like that last week! Of course I’m patting myself on the back right now, but it doesn’t mean that I’m full of myself! I’m sure there are thousands of people out there writing letters that talked about the creation of an EMF before the European authorities began discussing it…

The creation of this EMF would be like manna from heaven for Greece, and the other PIIGS… And… It would keep the egg off the faces of the ECB and the Eurozone officials. For those of you new to class, the ECB is the European Central Bank, and in no way are they going to allow the IMF to step in to help… This is the ECB’s baby.

OK… Enough on that! I read a report from my good friend, David Galland, yesterday, and his economist, Bud Conrad, who is among the best folks… Anyway… Bud was talking about the CBO’s (Congressional Budget Office) projections for the next 10 years, which says the deficit will see an additional $9.8 trillion… Bud was looking at the tax base, and concluded that the tax base will not grow as fast as the deficit.

So… That brings us back to what I always, always tell you… To finance the deficit, the country can raise taxes, raise interest rates aggressively, or allow a debasement of the dollar… Let’s go through those…

1. Raise taxes… This would increase the revenue, and decrease the amount of foreign financing needed.
2. Raise interest rates aggressively… This would make our Treasuries more attractive, and keep foreigners buying them to finance the deficit.
3. Allow a debasement of the dollar… This would allow foreigners to buy our Treasuries at a “discount” price and thus make them more attractive…

1. Hurts the economy… But face it, folks, this is what we’re leaving to our grandkids, higher taxes and less freedoms than we had, because of this deficit spending that’s gone on for 9 years now.
2. Hurts the economy… Yes, aggressively higher rates would bring the economy to its knees once again…
3. Well… You have to admit that what’s behind door #3 is what every politician, Treasury Secretary and Fed Chairman would prefer happened… But… For you and me… It represents a loss of purchasing power… Unless that is, you have taken steps to protect yourself from this choice…

In the end… It will most likely be a combination of higher taxes and a cheaper dollar… Oh boy, where do I sign up for that? I shake my head in disgust…

Then there was this… A new reader – and there a tons of them after the Wall Street Journal article – asked me what a “Pfennig” was… And I thought… Here’s my chance to tell everyone the history… In 1991, I took over the trading of foreign bonds at Mark Twain Bank. Now to do this job correctly I needed to come in quite early and get caught up on markets that were 8 hours ahead of me. I then noticed that the sales guys would come in and spend a good part of their morning trying to get caught up on the markets overseas… I decided to start writing a quick morning note about the markets that they would have on their desks when they came in, and therefore would be ready to begin trading immediately… The sales guys started taking those morning notes and faxing them to their customers… These were hand written, folks! In 1994, Frank Trotter, created the website for Mark Twain Bank, and we began putting the, now typed notes on the website… Frank then coined the term, “A Pfennig For Your Thoughts” which was the play on the American phrase, “A Penny For Your Thoughts”… The Pfennig, at the time, was the lowest denomination of a Deutsche Mark, and since I was talking about foreign markets and currencies it all fit… In 2001, the marketing team at EverBank changed the name to the “Daily Pfennig”… But I still refer to it as “A Pfennig For Your Thoughts”…

To recap… The currency rally yesterday was stopped in its tracks by Greek PM Papandreou’s comments… Loose lips, sink ships, is what he should have thought before speaking! Gold also took a shot to the chin yesterday. The Aussie jobs report was good, but Capacity Utilization dropped, which wasn’t good. We start today with currencies a bit lower than yesterday’s starting point…

The Daily Reckoning