Who is AA+?

Consider that over the past 40 years, the purchasing power of the US (and Canadian and most European) currency has fallen by more than 95%, the question is not “why did S&P lower the rating on the US national debt by one notch”, but “why has the S&P not lowered its rating of US government debt from ‘AAA’ to ‘C’ for speculative a long time ago? And while they are at it, why are the ratings on the national debts of [most] Anglo-Saxon countries as high as they are, given their abysmal records of maintaining the purchasing power of their currencies?

The mere fact that all of those governments have been able to keep borrowing the necessary amounts of money to keep rolling over their debts, all the while increasing the amounts outstanding, does not make those debts worthy of an ‘A’ and higher rating. As Sydney Homer once famously said, it is not the return on the capital which is important, it is the return of the capital which is the key to a successful investment. Pity the unfortunate retiree, now 95, who was fortunate enough to be able to retire in 1970 at 55 with plenty of capital to ensure a long and prosperous older age, and bought long-lived government bonds for their safety of income and principal. Hopefully, he/she is now toothless and has Alzheimer’s so that he/she is blissfully unaware of his/her current plight. Because truth to tell, unless he/she has generous children, he is probably living on pablum in one of the lesser retirement homes for the poor.

My own father, in 1956 when he worked for one of the large life insurance companies, bought an annuity for my mother which would pay her $88 a month for life when she reached 65. He passed in 1961. At that time, $88 a month would have been adequate to provide a decent standard of living for a retiree. (Un)fortunately, my mother passed in 2009, having lived to be almost 100, by which time the $88 that came in every month barely managed to pay her cable TV and phone bill.

The question is, if you – knowingly – were offered a 30 or 40-year bond investment which was guaranteed to return you 5% of the purchasing power of your initial capital at maturity, would you cheerfully pony up a) all, b) some, or c) none of your capital? And, notionally speaking, what sort of credit rating would you put on those obligations? If S&P had slapped an AAA rating on that debt, would you a) nod your head and buy it, b) give S&P the benefit of the doubt, of which you have a lot, and buy some, or c) laugh out loud, then buy gold, or the Swiss franc, or common stocks, or indeed almost anything else, instead?

And so my parting query is, is US (and most Western) debt really AA+ now? And what would you do, if you ran Standard and Poor’s?


About rosshealy

C. Ross Healy, MBA, CFA Chairman, Strategic Analysis Corporation Ross Healy began his investment industry career in 1965 as a securities analyst for Midland Osler Securities. He was a co-founder of Sceptre Investment Council in 1970, a leading Canadian money manager. In 1984, he became Director of Research at Merrill Lynch Canada, and during this time provided support for the late Dr. Verne Atrill, the theorist who decoded the mathematics underlying the Theory of Accounting Dynamics upon which the Strategic Analysis Corporation (SAC) methodology is based. After supporting and collaborating with Dr. Atrill for many years, he joined SAC as Chairman and CEO in 1989 following the death of Dr. Atrill. Ross Healy is a past president of the Toronto CFA Society, and served on the board of the Financial Analysts Federation (now the CFA Institute) as Chairman of the Financial Analysts Journal committee, the academic arm of the CFA Society. He has served on the Financial Disclosure Advisory Board of the Ontario Securities Commission, and was a member of the Executive Committee of Trinity College, University of Toronto, chairing the Investment Committee. He currently serves as the Chairman of the Board of Trustees of Eglinton St. George’s United Church of Toronto. He contributes investment analysis to print, radio, and television media, and has been appearing regularly on Business News Network (BNN) for the past 15 years, and the Canadian Broadcasting Corporation (CBC). There is an award-winning book written about his analysis leading up to the collapse of Nortel Networks (The Bubble and The Bear, How Nortel Burst the Canadian Dream, by Douglas Hunter, Doubleday Canada, 2002. He was the “Bear” in the book.). Email Address: rhealy@strategicanalysis.ca Company Website: www.strategicanalysis.ca Telephone (work): 416-498-3604 x 133 Cell: 416-258-8342
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