The FinancialTimes reported early on Monday that Standard & Poor’s will announce a potential downgrade of five triple-A rated governments.As of writing time, no announcement has been made.
Investors see what the ratings agencies also see, but are too slow to call out – the financial condition of major governments is not nearly as attractive as it appears.In particular, Germany and France are handicapped by the weight of other EU nations struggling with high debt yields.
Rethink the Ratings
Ratings from the major credit agencies have several focuses, but in general the agencies seek to rate an institution’s ability to make payments on their obligations.That is, ratings agencies make public their own evaluation of a country’s or company’s ability to generate cash.
A common saying says something like, “a bird in the hand is worth two in the bush,” implying that one of something guaranteed is worth more than the potential to have two of something in the future.If you were to offer a similar saying to a financier, he or she could certainly try to argue the case that the odds-on value for two in the bush is actually worth more than one in hand.
This seems to be the real compromising problem in the financial markets.Investing methodologies that were most popular in the past – those that encouraged the preservation of capital – are simply “old school.”Investors have taken to a form of gambling in the idea that with enough events, their odds-on wagers will eventually pay off for a profit.
It’s hard to make the case that any company or country without enough cash on hand to immediately pay their debts should be triple-A.This is a hallmark of the triple-A system for corporate enterprises, but also a key function of the rating’s system for world governments.Luckily for government, the printing press ensures that any bill can be paid, it’s just a matter of whether or not those future debt payments actually have real value today.
If bullion or any hard asset were to be compared to a debt security there is no reason it wouldn’t be triple-A.Consider that a bet on bullion is essentially a bet on a future payoff.This future payoff, which is hopefully more than the current purchase price, is cemented by indirect future cash flows.Future inflation should give lift to any hard asset.
If the ratings agencies can comfortably assign a triple-A rating to any printing press, it should be clear that theoretically this rating should extend to hard assets.Not only are hard assets tangible, always valuable, and historically understood to keep pace with inflation, but they’re also guaranteed to be deliverable.There’s no risk in turning over fifteen, twenty dollar bills for a stack of silver bullion.On the contrary, there is significant risk to turning over the same $300 for slightly more than $300 in the future.
This basic tenant of investing should not be lost for the purposes of greater sophistication.Investors who want to realize a future outcome today with the greatest possible safety should turn to silver.
Dr. Jeffrey Lewis