Why This Downgrade is a “Buy, Buy, Buy!”

The United States lives (or dies) by its outstanding credit rating.

It must be that way, given it’s running a $1.5 trillion deficit this year alone.

In practice, that creditworthiness is secured by the world’s largest, most dynamic economy, undergirded by the rule of law…and the government’s ability to print truckloads of the world’s premier reserve currency.

After all, Uncle Sam always pays his bills on time. That’s why U.S. Treasuries are seen the world over as a risk-free destination for folks seeking a little return on their money.

More than that, Treasuries are seen as a benchmark… for the very idea of stability itself.

So, when Fitch Ratings downgraded the U.S. government’s credit rating, from AAA to AA+, the entire world took notice.

The ratings agency cited “concerns” about the “quality” of government. That was a clear reference to the recent debt-ceiling crisis.

The news sounds bad. But this isn’t a disaster. It isn’t even unprecedented, let alone permanent.

The truth is this “downgrade” from Fitch is an empty gesture. But for savvy investors, it’s an opportunity we haven’t seen for months…

We’ve Been Here Before

For generations, there was never a question that the U.S. government would default on its debt. The “debt ceiling” was a formality. And the government paid Treasury bondholders as a matter of routine.

But in 2011, Congressional Republicans used the debt ceiling to extract deep spending concessions from the Obama Administration. In the process, they took the government to the brink of default.

Its hard to quantify the kind of damage a U.S. default would do to the domestic and global economy. But mainstream economists on the right and left generally agree… it’d be bad.

That’s why fights over the debt ceiling are so dramatic.

The first time Americans had to consider the possible impacts of a default was 12 years ago

Standard & Poor’s picked that particular moment to issue its first-ever downgrade of U.S. credit.

In August 2011, it slashed the government’s credit rating from AAA to AA+. Much like Fitch, it cited concerns over political dysfunction and unsustainable fiscal policy.

The uproar was immediate and ferocious.

Both Republican and Democratic politicians criticized the downgrade (and each other). Global stock markets tanked. In the U.S., the big indexes saw one-day declines between 5% and 7%. Another in a growing list of “Black Mondays.”

However, U.S. Treasury prices rose immediately after the downgrade. So did the greenback. Its gains against the euro and sterling were particularly sharp.

That’s because the U.S. downgrade took place against the backdrop of the European sovereign debt crisis. Investors clearly saw the United States, and its AA+ credit rating, as the best-lookin’ horse in the glue factory.

Borrowing costs remained largely unaffected. In 2014, S&P upgraded Uncle Sam’s credit rating, returning it to AAA.

It’s playing out slightly differently now, of course...

Buy the Dip… The Downgrade’s a Zero

Fitch, with its note about “declining quality of governance” and “unsustainable fiscal policy” was  trying to send a particular message to the U.S. government and its taxpayers: Get back on the straight-and-narrow.

And they may be right. But we’re not here to talk about that.

Stocks dipped between 1% and 2% Wednesday. Though it was clear that the steeper losses on the Nasdaq meant investors were more worried about strong jobs numbers and a hawkish Fed than U.S. credit.

The political uproar was much more muted.

By Thursday, stocks had trimmed their losses amid mixed-to-good economic data and strong earnings. Treasury yields were higher, but big buyers like Berkshire Hathaway (BRK-B) were still stuffing their pockets with them.

This reaction is evidence that this downgrade is really a buying opportunity.

So, dust off your shopping lists and snap up bargains you’ve had your eyes on during the most recent bull run.

Valuations have been stretched… and a dip like this is very, very “buyable.” The chance might not come again anytime soon.

You won’t regret it.

Fitch’s downgrade is entirely symbolic. Treasuries are still backed by a juggernaut economy governed by the rule of law. They’re still going to be served by an immense, liquid market, and the United States will have no immediate problem raising money.

Banks, which are some of the most important holders of U.S. debt, still view Treasuries as risk-free.

A AA+ rating is far from poor. Countries with less debt and better-functioning governments, like Canada, Austria, Finland, and New Zealand all sport AA+ ratings from Fitch. They’re near the top tier of global borrowers. There’s not a banana republic among them. Only nine other countries, plus the European Union, hold Fitch AAA ratings.

And it’s entirely likely the United States will experience an “upgrade” before long.

Until next time,

Greg Madison