Rush to Irrelevance

Last week S&P affirmed France’s AAA credit rating. What?

S&P’s widely expected downgrade of the U.S. from AAA to AA+ was greeted with yawns, scorn, and concern. Republicans are trying to figure out how to pin this on the President; Democrats want to blame the Tea Party; economists point to S&P’s $2 trillion error; and most folks wonder how it would affect them.

A week later, interest rates are dramatically lower; the stock market is roughly where it started out; and France has had its AAA credit rating affirmed by S&P. France is AAA, while the US is AA+. To speak plainly, this is ridiculous: in no recognizable universe is France a better credit risk than the US. There is no permutation of the laws of finance or physics that can make such a claim credible.

Consider les differences: the US economy is $14.5 trillion, France is $2.5 trillion. The US prints its own currency; France is on the Euro. The US has vast energy, mineral, and other natural resources; France does not. The US population is young and growing; France’s is old and stagnant. Our banking system is well-capitalized and independent; France’s is under-capitalized and subject to nationalization—hey, they’ve done it before.

You might think that S&P affirmed France’s rating to avoid a financial panic last week, after it caused one by downgrading us, which they partially brought about through their bogus AAA ratings for junk MBS. But that would imply that they’re making it up as they go along. They wouldn’t do that, would they?

Once again, S&P’s lack of discipline reinforces its own irrelevance. It’s only a matter of time before no one pays them any attention.

Douglas R. Tengdin, CFA
Chief Investment Officer
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