USA AAA is Still on Negative Credit Watch.
Wall Street is hot this summer (after a spring of bank failures). Stocks are in a rally. The sun is still shining – perhaps a little too hot in a lot of areas. However, there are a few noteworthy economic storms on the horizon.
Below are four major events and a new trend that are happening now and over the next few months to be aware of. I’m also noting how each event could impact various aspects of the economy, as well as our personal wallet.
Here are the points I’ll discuss.
The Fed Meeting July 26, 2023
USA AAA Credit on Negative Watch
Student Loans Start Back Up Sept. 1, 2023
Bank Credit Tightening
Fearmongering & Get Rich Quick Videos
And here is more information on each point.
The Fed Meeting
On July 26, 2023, the Federal Reserve Board is widely expected to raise interest rates by another 25 basis points. There is pretty much a general consensus with the leading economists on this. Many of them also hope that it will be the last interest rate hike of the year. However, the Federal Reserve Board’s own projections from the June 2023 meeting suggest there could be another 25 basis points hike sometime this year.
Higher interest rates will keep a lot of home buyers on the sidelines. They also make it difficult and more expensive for corporations to borrow money. The federal agencies and banks are working with distressed homeowners and corporations to try and help them get through this period. Low-rated commercial real estate companies are particularly in trouble, with office buildings still half empty in many U.S. cities. (Click to read my blog on CRE.)
USA AAA Credit on Negative Watch
The USA AAA credit rating was placed on a Negative Watch by Fitch Ratings on May 24, 2023, during the Debt Ceiling crisis. On June 3, 2023, the Debt Ceiling was raised. However, instead of removing the Negative Watch, Fitch issued a report on July 10, 2023 claiming that “a reluctance to raise taxes or reduce spending makes it difficult to narrow fiscal deficits consistent with stabilizing the [General Government] debt ratio.”
On July 20, 2023, another report was published. In that report, James McCormack, the Managing Director, Global Head of Sovereigns at Fitch Ratings, wrote, “Twelve-month trailing rating changes may be positive for [Emerging Markets] and negative for [Developed Markets] in 2H23, based on the current Outlook distribution and year-to-date rating changes.” That doesn’t bode well for the U.S., as it is the only one of the eleven AAA countries with a Negative Watch in place. (Others are all rated Stable at this time.)
It is typical for rating agencies to resolve the matter one way or another within a six-month period. That means that between now and November 24, 2023, we should expect some news on the matter. Summer can be the time when politicians, policymakers and ratings agencies try to bury bad news. (It’s no surprise that the Fed rate hike is expected for July, when many people are on vacation, rather than the June meeting.) As an example, when S&P Global downgraded the U.S. credit from AAA to AA+, it was on August 5, 2011 (a Friday) at 5:05 pm ET, while most of Wall Street was in Europe on holiday.
See below for the current sovereign ratings of the Fitch AAAs (including 3 AAs – Canada, France and the U.K.
In the months leading up to the S&P Global downgrade of the U.S. AAA credit rating on August 5, 2011, stocks took a nosedive, but ended up 13.5% on the year. 2011 was also the year that gold and silver hit highs. As we discuss in greater detail at our Investor Empowerment Retreat, gold is still close to its all-time high, while silver has plenty of room to run from its current price of $24.60/ounce, back to its all-time high of $48.70/ounce, set on April 28, 2011.
Student Loans Start Back Up Sept. 1, 2023
Americans will have to start repaying their student loans effective September 1, 2023. According to the Federal Reserve Bank of New York, college debt is at $1.6 trillion.
This could be an issue for all areas of the economy, as it will limit consumer spending on other things. Almost 70% of the US GDP is directly linked to consumer spending.
There could also be more stress in credit card ($1 trillion) and auto loan debt ($1.56 trillion). This is negative for banks and all financial services companies, including fund companies, insurance companies, and pension providers. (Read my blog on why we are underweighting this industry. Join us at our Oct. 7-9, 2023 Retreat to learn how to underweight the industry!)
Mortgages are likely to be a problem as well, particularly since most people under 40, many of whom still have student loans, are spending 30-50% of their income on housing. However, as might be expected, people will try to hang onto their home any way they can for as long as they can. Plus there is a Homeowners’ Assistance Fund in play, which has brought foreclosures to historic lows. So housing prices are not likely to go down meaningfully soon, even with this new development. Learn more about housing, CRE and REITs in this blog.
Bank Credit Tightening
Bank failures, rising interest rates and capital requirements are likely to tighten credit availability.
This will slow the economy down. Expectations for U.S. GDP growth in 2023 are just 1.0%, with two quarters of contraction projected for the 2nd half of the year.
Increased capital requirements, along with another rate hike, will be an even bigger issue for regional and community banks, which are already struggling from reduced mortgage income, CRE exposure and long-term bonds. It’s important to understand that the underlying issues that sank Silicon Valley Bank, First Republic, and Signature Bank are not limited to those institutions. Most banks, insurance companies, and even individuals have exposure to long-term bonds that are illiquid, negative-yielding and losing value. Bank of America had exposure to $100 billion in paper losses over their bond portfolio in the 1st quarter of 2023, according to The Financial Times (based on FDIC.gov data). Banks are getting bond support from a special Federal Reserve facility. Individuals are not.
As we’ve been warning for the last decade, investors simply weren’t getting paid to take on the risk of these low-yielding, long-term contracts. (Some maturity dates are longer than we live!) It is possible to get a safe yield in the bond market these days. However, it’s important to be strategic about your plan. It’s a bit tricky. That’s why we spend one full day on what’s safe at our Investor Empowerment Retreat. The next one is October 7-9, 2023. Join us. You’ll get the best price if you register by July 31, 2023.
Fearmongering & Get Rich Quick Videos
In the morning, during my yoga workout routine, I play YouTube music. My Kirtan is always interrupted by ads. More and more these days I’m hearing ads for what you do when the U.S. dollar collapses, or “Why aren’t you investing in tax liens or gold,” and other fearmongering, or Get Rich Quick schemes. These videos are marketing campaigns. They scare the hell out of us in order to sell us into something. The truth is that the best wealth plan is properly diversified, protected, and hot.
Yes, there is an element of truth to all of the fears that we have. However, the solution isn’t going to be a crypto coin, a gold coin, a tax lien, a Shoot the Moon YOLO stock, or any other hyped up ruse. Our pie chart system allows people to invest in gold, silver, crypto, YOLOs, and anything they want within reason, properly diversified, while also applying an automatic Buy Low, Sell High, Capture Gains strategy to the mix. In this way, we can always protect our wealth – remember we’ve been warning about bonds for a decade – while also participating in rallies, such as we’re experiencing today.
Sometimes we have to endure a long Crypto Winter, or watch gold or silver languish, being the worst performers for a great deal of time, in order to ride on the crest of the wave when they soar back into favor. However, having a plan that keeps us in the game, encourages us to buy low, and prompts us to capture gains when they shoot the moon, is essential in the volatile times that we live in.
Some of the low hanging fruit of protecting our wealth lies close to home. We can save thousands annually with smarter big-ticket budget choices (outlined at the retreat and in my books). The best interest rate could be found in generating our own energy, or embracing energy efficiency, or rethinking our transportation. The goal is to keep our money in our own family, rather than making the landlord, bank, debt collector, gas station, insurance company, utility provider, etc. rich at our own expense. These are more topics that we cover at the retreat.
If we wait for the headline that the U.S. AAA credit rating has been downgraded by Fitch, it could be too late to protect our wealth. It’s important to be the boss of our money because
managed wealth plans just ride the Wall Street rollercoaster, rising and falling with the waves that are stirred up by the whales, the large institutional investors and banks. 21st Century recessions can cost Main Street half of their wealth. That’s why it’s so important to make sure that we have a time proven, 21st-century plan in place now – that we fix the roof while the sun is still shining.
The more fear, uncertainty, and doubt – FUD – the more ruses abound, and the more vulnerable we are because when we are in our fear, we’re willing to have blind faith that someone else is protecting our future. A better idea is to have wisdom and certainty that the plan we have in place is protecting our wealth, from all unexpected and unwelcome surprises, such as housing unaffordability, rising interest rates, student loans, bank failures, and even a potential downgrade of the USA AAA credit rating by Fitch Ratings. (I also offer unbiased 2nd opinions on your wealth plan through my private coaching.)
Join us for our October 7-9, 2023 online Financial Empowerment Retreat. Register by July 31, 2023 to receive the best price. If you’re interested in private coaching or an unbiased 2nd opinion before then, reach out now. September is often the worst performing month of the year, so it’s a good idea to be ahead of the headlines. Again, feel free to email firstname.lastname@example.org or call 310-430-2397.
Our unbiased 2nd opinion details exactly what you own, with color codes to show you what’s toxic in your portfolio, what’s great, and what should be better diversified. You will have a blueprint of how to get safe, protected, hot and diversified. Why is it unbiased? We don’t sell financial products. We have no incentive to sell you something that might lose money or that you don’t need. Our business model is financial education, providing the news, information, and education that Main Street investors need to thrive and live a richer life.
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Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. Natalie is the bestselling author of The Power of 8 Billion: It's Up to Us and is the co-creator of the Earth Gratitude Project. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). Her book The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 5th edition of The ABCs of Money was released on September 17, 2021.
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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.