My recent big prediction proved true this morning, which was that credit rating agencies will certainly not wait for an actual default on US debt before they start to downgrade US credit. Now, you might think that was an obvious prediction, but you didn’t hear many others warning about it; and US government officials certainly have not acted as if they realize that simple fact, nor said anything about it. So, it is an easy prediction that seems to elude almost everyone! And it is a BIG prediction because today’s news begins the downgrade process that will be devastating if it goes one step further. Today’s staunch credit warning from one of the nation’s big-three rating agencies puts our toes to the edge of the precipice.
This morning Fitch placed a negative outlook on US credit. Fitch did one other thing that was very interesting in light of my own earlier article this week. (See: “Debt Default is Just a Terror Tactic, but it Will Blow up Stocks and Likely a Lot More, Regardless.”) It became the first I’ve seen in mainstream media to admit that failure to raise the debt ceiling does not inevitably lead to a credit default, noting that a default would only happen if the US chose not to prioritize debt payments over other expenses. So, there it is. Someone has finally said it in the mainstream media, though it was entirely glossed over in article linked to in the headlines below.
All talk has been that if we get to Yellen’s X-day in June without a debt deal, then the US will plunge into default, and its credit will be downgraded. The blindness there is nothing short of astounding. Credit agencies won’t even wait for (as I call it) D-day (debt-day) — the day when the Treasury is exhausted just before default or other expense-cutting options that are also being ignored by all. A serious downgrade will certainly happen before default and likely before D-day, even though default does not have to happen even if the ceiling is not lifted. In part, that will be because no one even knows when D-day is. June 1st? June 15th? Credit agencies are not going to sit around and wait to find out.
Nevertheless, back in Washington, Democrats continue to pound the credit default issue, as if that is the only path they can imagine themselves taking if the debt ceiling is not raised; and Republicans, oddly, continue to let them make that message without any rebuttal. Apparently, both sides continue want to raise the worst-case scenario as the only scenario, both willing to put the nation at risk of economic wreckage if they fail to win their battle over the budget by turning this into an ultimatum that sees no outcome to an agreement failure other than default. Even though another outcome, even without agreement to raise the debt ceiling, is easy to see.
While almost no one seems to get it, the stock market is proving itself the dumbest of all. Even with China reporting that it may face as many as 65-MILLION new cases of Covid a week in its latest outbreak of a new strain and with Chineses stocks falling and its economy already faltering for months and with Fitch’s new credit outlook downgrade — first such motion since 2011 — and with the US government still in a total deadlock over the debt ceiling, the NASDAQ and S&P 500 climbed this morning as Nvidia particularly demonstrated the extremes of market stupidity by soaring 25% in one day yesterday!
Here is one major part of what they all don’t get, as I wrote in my own article referenced above: No matter which way the debt ceiling argument breaks now that it has been dragged out for months, the news is bad for stocks. Finally, today, one market analyst pointed that out, making the same case I did. If the ceiling is raised, a flood of new Treasuries will be issued, pushing up Treasury interest rates up in a situation where the Fed is no longer buying. Bad for stocks. If the ceiling is not raised, US credit will see significant downgrades because, even Fitch notes that it cannot be sure the government will not choose the path of default over not paying other expenses. It doesn’t matter, at that point, if the US doesn’t actually default; the very fact that lawmakers and the Biden admin hit D-day without a deal will prove how reckless with credit they are willing to be and will cause significant credit downgrades because no one trusts reckless managers.