Let me get this straight: The United States is no longer among the ranks of countries most able to pay their bills, but France—whose banks are chock full of euro-zone debt—is? To quote Ace Ventura, aaalll righty then.
To catch you up—in case you were vacationing somewhere off the planet—last week, Standard & Poor’s lowered the credit rating on U.S. Treasury bonds to AA+ from AAA. As George Farra of Indianapolis-based Woodley Farra Manion Portfolio Management pointed out in an IBJ.com story, the ratings downgrade caused investors to flee the stock market and pour the proceeds into the very securities that had just been downgraded. This investor behavior, known as a flight to safety—in an example of moronic irony, sent the prices of the downgraded U.S. Treasury securities soaring in value.
In a similar vein, investors bailed out of bank stocks, causing them to careen lower in price, then turned around and deposited the proceeds into the very banks in which they were afraid to hold stock. The massive inflow of funds caused the Bank of New York to take the extraordinary step of telling large clients it would charge them to hold their cash.
Iconic investors weighed in on S&P’s move with diverse opinions. Warren Buffett chastised the downgrade, saying the United States merits a “quadruple A” rating, while Bill Gross commended S&P for its “spine” in recognizing the enormous problem of the country’s mounting debt. In a sense, both have a point. The government will never default because it can print money at will. The only problem is that the more the printing press runs, the less those dollars are worth.
Treasury Department officials admonished the ratings cut, saying they have discovered “a basic math error of significant consequence” in the assumptions used by S&P to justify the debt downgrade.
Regardless, the stock market—already balancing on eggshells following Washington, D.C.’s debt-ceiling fiasco—was sent into a tailspin. The dramatic market volatility brought back recent memories of the fall of 2008, when the credit crisis hit full stride. Today, these frantic market swings are often driven by short-term trading techniques employed by hedge funds, such as dynamic hedging that triggers accelerated selling.
We have always thought the academic premise that equates uncertainty and market volatility with risk is flawed. Rarely do investors achieve the nirvana of steady, high rates of return. The most recent cases—including Bernie Madoff’s consistent 10-percent return scheme and Alan Stanford’s double-digit “certificates of deposit”—have turned out to be fraud.
To a long-term, value-oriented investor, volatility should be viewed as opportunity. The crazy prices that are occasionally offered up by a roller-coaster market in periods of uncertainty allow for the purchase of undervalued securities.
We are still in the camp that there won’t be a double-dip recession. Instead, the economy seems destined to muddle along for an extended period of time while the elevated debt levels of both governments and consumers are dealt with.
So nothing is really new. Some call that the “new normal.” Others have dubbed it a “growth recession.” For investors, high-quality multinational companies that pay attractive dividends continue to be a reasonable place to pick away.•
Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or [email protected]