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Why the Cascade of Downgrades Has Barely Begun
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Posted on 01/16/2012, 13:10
By Martin D. Weiss, Ph.D.
If you think our politicians are often hypocritical in their denials of financial sins, take a look at what's happened in Europe:
Just a few weeks ago, when leading European politicians feared their countries were going to lose their triple-A ratings, they reacted with anger and venom, tacitly acknowledging that the looming ratings downgrades would be tragic.
But on Friday, when the dreaded downgrades were actually announced, those very same politicians solemnly denied that the event was of any importance!
Where's the truth?
If you think our politicians are often hypocritical in their denials of financial sins, take a look at what's happened in Europe:
Just a few weeks ago, when leading European politicians feared their countries were going to lose their triple-A ratings, they reacted with anger and venom, tacitly acknowledging that the looming ratings downgrades would be tragic.
But on Friday, when the dreaded downgrades were actually announced, those very same politicians solemnly denied that the event was of any importance!
Where's the truth?
For the best answer, you need only remember the famous 19th century refrain of Otto von Bismarck: "Never believe anything in politics until it has been officially denied."
And for the best investment guidance, you need only refer to the early 20th century warnings of Bernard Baruch: "Never follow the crowd."
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Right now, the crowd seems to think last week's downgrades of major European countries are a "non-event." But here are the facts:
Fact #1
When the world's largest countries lose their triple-A rating, it's a watershed.
Case in point: Some pundits would have you believe that last year's downgrade of U.S. debt was just an "isolated event."
But what they fail to mention is that it set off a chain reaction of collapses in other bonds and credit instruments around the world.
Global investors asked: "If even the credit of the U.S. is suspect, how can we trust the credit of any other borrower on the entire planet?"
Most didn't wait for the answer. They dumped sovereign bonds, junk bonds, and other risk assets.
And now, here we are, a half-year later, with two MORE major nations losing their highly coveted triple-A ratings — France and Austria.
Both are pivotal contributors to the EFSF — the European bailout fund that's supposed to help protect the euro-zone countries from sinking finances and ratings downgrades.
Yet both are now suffering from precisely the same consequences — sinking finances and ratings downgrades!
This is precisely what we predicted when massive bailouts were first announced in the U.S. and Europe over three years ago. Now it's happening.
Fact #2
Multi-country downgrades are a red flag.
As you can see, even the downgrade of just ONE large country must be viewed as a pivotal event. But on Friday, Standard & Poor's Rating Services went far beyond that:
It not only downgraded France and Austria, but it also slashed the ratings of Spain, Italy, Portugal, Malta, Slovakia, and Slovenia.
This clearly signals far more than just "isolated problems in the PIIGS countries," the story line of officials throughout the first years of the European crisis.
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Fact #3
The cascade of downgrades has barely begun.
Standard & Poor's has placed the overwhelming majority of European Union countries on credit watch.
In other words, even after the Friday Night Ratings Massacre announced by Standard & Poor's last week, the overwhelming majority of countries of the European Union remain, as before, on the chopping block for still further downgrades to come!
I won't speculate regarding which country the ratings agencies will downgrade next ... or when. But I can say this with great certainty: What you saw happen on Friday is not a one-time event!
Quite the contrary, the recent history of sovereign debt downgrades in Europe shows that the first downgrades are almost invariably followed by many more.
Why? Because ...
Fact #4
The Big Three ratings agencies continue to ignore, over-estimate, or cover up the true weaknesses of the sovereign nations they rate.
For years, Standard & Poor's, Moody's, and Fitch have grossly overstated the strength of Greece, Ireland, Portugal, Spain, and Italy ... while pooh-poohing massive debts and making excuses for out-of-control deficits.
Today, they have finally recognized the severity of these debt disasters in Greece and some other PIIGS countries. But they have barely begun to do so for countries like France and Austria — let alone Germany.
What IS the true and accurate rating of the major European countries downgraded by Standard & Poor's on Friday?
For the most straightforward answer, I suggest you look at our current Weiss Sovereign Debt Rating for each:
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Even after S&P's Friday downgrade, and even after converting our "ABCDE" scale to their AAA-to-C scale, most of our ratings are still three to four notches lower than the ratings assigned by the other agencies.
And remember: All of the grades are driven strictly by the real numbers on each country's ...
• overall reliance on deficits and debts in proportion to the size of its economy and population ...
• stability in terms of its currency and reserves ...
• long-term sustainability of economic growth, and ...
• capacity to borrow readily in the marketplace.
Our grades represent our unbiased opinion free from any conflicts of interest.
And our grades have been the only ones that have consistently warned investors of future failures, collapses, and defaults.
Overall, the evidence is clear: The downgrades of European countries you've seen so far is just the tip of the iceberg!
What To Do
The great news is that you don't have to throw caution to the wind, dive into the market willy-nilly, or expose yourself to massive losses.
Thanks to a unique blend of powerful new investment vehicles and time-honored risk-management strategies, it is VERY possible to invest confidently even in these tricky times.
First, you can use a special kind of exchange-traded fund (ETF) as portfolio insurance. They're inverse ETFs, designed to go UP when key markets — such as Europe's stocks and bonds — go DOWN.
That can come in mighty handy at times like this. With Europe hanging by a thread, using an ETF that pays you up to $3 for every $1 the overall market declines provides tremendous peace of mind.
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Second, in addition to inverse ETFs that guard you against an overall market declines, you can use ETFs that can rise independently of the U.S. stock market. Examples: ETFs dedicated to gold or strong currencies.
Third, when it comes to U.S. stocks, you can stick with what we call "contrarian gems."
This probably won't come as a surprise to you. But typically, high-quality stocks that have been unfairly beaten half to death by the crowd don't have near as far to fall in tough times.
For example, in the last major bear market, the average S&P 500 stock lost 54.5% of its value. It was a bloodbath of monumental proportions for the crowd. Wailing and gnashing of teeth could be heard from one end of Wall Street to the other.
But it was nothing of the kind for contrarian investors who picked up the stocks the crowd had been selling.
While the average Dow and S&P 500 stock lost half or more of its value, contrarian investors saw Royal Gold rise 21.2% ... Micromet jump 41% ... Netflix soar 66.7%.
And believe it or not, Questcor Pharmaceuticals bounced back from the drubbing it had received at the hands of the Wall Street crowd — and defying the most voracious bear market since the Great Depression, it skyrocketed 504.8% in value!
Fourth, take profits as you go along. This simple strategy reduces your risk of loss as the value of your stocks and ETFs climb. Plus, it has the added advantage of locking in your profits as you go along.
For example, you can sell one-quarter of your position when you have a 25% profit ... and sell another quarter when it's up 50%.
Fifth, sell losing positions as quickly as possible. Or better yet, include a mandatory stop-loss on every investment you buy.
Sixth, be sure to keep plenty of cash on hand. By doing so, you minimize risk to your overall portfolio and also make sure you have plenty of money available to jump on fast-breaking opportunities.
You have your cake and eat it too. You get to grab substantial profit potential and still enjoy layer after layer of safety.
That's particularly important right now — as 2012 opens before us. The new year is a blank slate, waiting for us to write our stories on it.
The story we want most for you in 2012 is one of investment success! That's why the Weiss team burned the midnight oil to produce a landmark new video for you.
Its title is "Make 2012 Your Most Profitable Year Ever."
Its purpose is to help you start this promising new year on the right foot.
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This eye-opening video costs you nothing to watch — and it could make all the difference for you in 2012!
But we're only leaving it online for a short while longer. Turn up your computer speakers and click this link if you want to watch it now.
Good luck and God bless!
Martin
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