3 Ring Circus: Geithner, Buffett, and Obama

The circus that is Washington and Wall Street continued on Monday as the Dow (NYSE:DIA) had its 6th worst single day decline in history.  The Nasdaq (NASDAQ:QQQQ) fell nearly 7%, and the S&P 500 (NYSE:SPY) fell a very appropriate 6.66%. Although S&P (NYSE:MHP) downgraded U.S. debt on Friday, U.S. financial markets didn’t have a chance to react until Monday’s opening.  What’s even more interesting, is the reaction of the talking heads as the U.S. continues to struggle in the Great Recession.

Treasury Secretary Tim Geithner, who said last April that there was no risk the U.S. could loose its AAA credit rating, voiced his thoughts on the downgrade.  He said, “ They’ve handled themselves very poorly, and they’ve shown a stunning lack of knowledge about the basic U.S. fiscal budget math.”  What exactly are they misunderstanding? The U.S. is the largest debtor nation in the world, and spending outlays vastly outnumber revenue.  Geithner went on to say that U.S. bonds were just as safe after the downgrade as before, and predicted that China and investors would remain strong buyers of government debt.

On Monday morning, with stock futures heading sharply lower, Warren Buffett tried to inject confidence into the financial markets.  Buffett explained that he believes the U.S. debt is still rated AAA, and the downgrade does not change his mind about government debt.  In fact, the legendary investor holds $47 billion in cash and equivalents as of June 30th.  He said, “ If I have to buy Treasuries at zero percent yield, I will.”  At least the large cash hoard shows that Buffett puts his money where his mouth is.  However, one also has to wonder if Buffett’s shareholdings in Moody’s (NYSE:MCO), a rival credit agency to S&P, has anything to do with his criticism of S&P.  To add fuel to the fire, S&P also cut Buffett’s Berkshire Hathaway (NYSE:BRKB) outlook from stable to negative.

Not to be outdone by Warren Buffett’s AAA endorsement, President Obama made a public announcement of his own on Monday.  Despite America’s financial hardship across the board, the President said, “ I’d give U.S. a quadruple-A rating.”  This was puzzling for many reasons ( besides the fact there is no quadruple-A rating).  America has a hard enough time keeping its AA+ or AAA rating, let alone achieving some pipe dream quadruple-A rating.  S&P may be the credit agency causing controversy now, but it’s not the only credit agency to downgrade America.  China’s credit rating agency Dagong,  recently cut America’s debt rating from A+ to A, with a negative outlook.  Dagong had already cut America’s credit rating last November from AA to A+ after QE2 was announced.

By the end of Monday, it was announced that the Senate banking committee had started a probe into the downgrade actions of S&P.  However, the damage is already done, confidence is broken in the markets.  Gold (NYSE:GLD) constantly reaching new highs is a clear example of this.  Perhaps the Senate banking committee should probe Fitch and Moody’s and investigate why they still have AAA ratings on U.S. debt?

Investors looking to hold precious metals (NYSE:DBP) in their portfolio may want to consider gold plays such as AngloGold (NYSE:AU), Newmont Mining (NYSE:NEM), or Market Vectors Jr Gold Miners ETF (NYSE:GDXJ).  Silver (NYSE:SLV) plays include First Majestic Silver (NYSE:AG), Endeavour Silver (AMEX:EXK), and Global X Silver Miners ETF (NYSE:SIL).

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Disclosure: Long AGQ.

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