Moody’s Gets Serious, S&P Joins the Club- Second Warning Shots

Moody’s sounded an alarm with another warning on the US Debt situation. Before we could organize our thoughts and let you know our opinion, S&P (pdf report) also jumped on board,  noting a 50% chance of a US Debt rating decrease.

Warning Shot

As we had first mentioned in our Taps Post in Mid April, the credit agencies (S&P, Moody’s and Fitch) after receiving a black eye on miss rating the terrible packaged Mortgage products over the last recessionary cycle, are being bold and more conservative in their comments. We think caution is good, as investing is risky and pointing out possible quicksand is much better than refraining.

We think it is very likely the debt ceiling will be raised and some type of agreement will occur.

The stakes are just too high in our opinion to allow this debt issue to become insurmountable. The agreement may come in the final hour, on the final day, we hope not, but with the various political agendas at issue, it is possible. Our wish is for a longer term positively trending agreement, which unfortunately does not seem likely at this time, but we will take what we can get.

Is it possible the US will receive a downgrade!

At this point it appears a downgrade is in the cards and may occur just to save face of the rating agencies even if the debt ceiling is raised, which is the root cause of the credit rating agencies issues.

What are the effects of a downgrade?

Our belief is not much today. Interest rates may gyrate a bit, and there would be much ammunition for the talking heads and most importantly our international trading partners.  Longer term we believe a downgrade may be a good thing, serving as a wake up call. Only time will tell.

Have a Good Day!

JK

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