The Fitch Prudent Policy Approach: SPY, QQQ

August 02, 2023, 15:18 pm ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Economists are dismissing the Fitch downgrade today, Yellen was surprised, while Jamie Dimond seemed to say that ‘it didn’t matter anyway.’  NOT SO FAST!

The requirement for regaining AAA is not good for continued strong economic growth.

Specifically, to regain AAA the US would need to cut spending and cut the deficit.  There are other components, but look no further than that. 

If estimates are correct and the 2023 deficit is $1.5 T, and Fitch is steadfast in its ‘prudent policies’ approach, much of that overspending is going to need to come out of the economy.

No matter how you slice it, the impact would be material if an amount that big was removed from the economy.  Arguably, the over-budget spending is largely why economic conditions look so good, and if the overspending stops it would look much different.  Think about it.

Fitch is basically saying that massive deficits are not acceptable, fiscal responsibility is required to have AAA, and unless the US gets its fiscal house together it’s not AAA.

Not too many years ago the ratings agencies got into hot water for not rating CDOs properly, that was the Credit Crisis, and these ratings agencies remember that like it was yesterday. 

We should expect Moody’s and Standard & Poors to strongly consider the same move.  If they do not move now they certainly could, with justification, at any time.  The US governance will be on alert, and sensitive to anything that might be the tipping point for these other two rating agencies.

If the US loses its AAA rating across the board it would have a ripple effect through the financial system.  In fact, if the risk of such an occurrence was high, the process of re-securitizing might start well before it was required.  For many, that might mean selling what was an AAA asset at a loss.

Unlike the cavalier response many economists seemed to have to the decision to downgrade by Fitch, I believe the risks are high, a ripple effect can follow, and it is very serious.  At best government spending falls, but it can be worse.  If all three agencies change their rating it would be a big problem.

Details are available in our Special Report:  The Fitch Downgrade

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