And then there were three.
Last week, ratings agency Moody’s lowered the credit rating of the United States, from AAA to Aa1, becoming the third –and final – agency to do so.
Standard & Poor’s kicked things off in 2011, lowering the rating amid a debt ceiling crisis, and Fitch followed suit in 2013. So it only took Moody’s 13 years to catch up with its colleagues. Welcome to the party.
The U.S. government, with the world’s reserve currency and printing press, is now considered a higher credit rating risk than Microsoft and Johnson & Johnson. Or countries like Germany, which is stuck bailing out the rest of the Eurozone, and whose economy has flatlined for a decade.
Taking a page from the government’s playbook, Moody’s, which noted that the credit rating was on a downgrade watch since late 2023, waited until after the market close Friday to announce the actual downgrade.
In the prior downgrades, markets saw a 6% selloff and a 12% selloff. In early morning trading, the stock market is down about 1%. That’s the problem with dropping news that’s already priced in.
We’ve been warning on the credit quality of the United States for some time. With total debt nearing $37 trillion, the math hasn’t been in favor, and the past few years have been well above average, with the government deficit spending at nearly 7% of GDP, a level that should be closer to zero during an economic boom.
As Secretary of the Treasury Scott Bessent noted over the weekend, “Moody’s is a lagging indicator. We didn’t get here in the past 100 days. We inherited 6.7% deficit to GDP, the highest ever not in a recession or war. We are determined to bring the spending down and grow the economy.”
Of course, a look at the latest attempt at a “Big, Beautiful,” spending bill out of Congress suggests that’s not really true either. In the meantime, the credit market is feeling the pain…
💸 Bond & Mortgage Yields Hit a Pain Point
With the credit downgrade, bond yields are pushing higher in early trading. The 30-year U.S. Treasury bond topped the key 5% rate this morning.
That’s not good, given that the third quarter is when a lot of refinancing of U.S. debt comes through. Yields need to be lower, not higher, to alleviate the soaring costs of managing our existing debt.
If only it were just a problem for over-indebted governments. Alas, it’s also a problem for consumers. 30-year mortgage rates, the backbone of the consumer economy, have pushed higher to 7.4%, closing in on 15-year highs.
It’s hard to argue for a housing market thaw at these interest rates. And it’s more likely that home prices will decline on average as some sales slip by.
Falling home prices, even for homeowners who have no intention of selling, may still weigh on their spending decisions. That’s based on a concept known as the “wealth effect.”
🌍 A Global Investment for the Ages
It’s every investor’s dream – finding not just an undervalued investment, but the equivalent of finding the Declaration of Independence in a picture frame at a garage sale.
Harvard managed to do just that. Even before the university became famous for its hedge-fund-like endowment, paid $27.50 in 1946 – about $500 today – for what it thought was a copy of the Magna Carta.
British historians now say that this copy is an original, dating from about the year 1300, over 300 years before Harvard was even founded in 1636. As an original, the value of Harvard’s Magna Carta is probably priceless, given the rarity and importance of document.
Originally dated from 1215, the Magna Carta is one of the first documents to spell out government power – in this case, to specifically limit the power of kings.
The U.S. Constitution is a logical evolution from that document, even if it’s a bit vague on the power to tax university endowments, as President Trump and Harvard are fighting over today.
🧠 UnitedHealth Insiders Buy Amid the Fear
The saga at UnitedHealth (UNH) has taken a new twist. Company insiders have started buying shares amid the recent plunge.
On Friday morning, three company directors reported that they were buying shares – enough to reverse a downtrend in the stock. Then, after the market close, the company’s CFO and a group CEO went in – bigly.
Here’s the full breakdown from OpenInsider:
$1 million, $5 million and $20 million buys are a signal. With multiple buys in the seven-figure range, this isn’t just a sign of dip-buying to assuage market fear.
Remember, company executives get stock options as part of their compensation. They have plenty of reasons to sell shares – to put a kid through college, to pay off a mortgage, even a messy divorce.
But they only have one reason to buy: They think shares are going higher.
As an expert on the importance of corporate insider trading (the legal kind), I can tell you that CEO and CFO buys are stronger signs than company directors picking up shares.
And for most companies, a six-figure buy is a good sign. For a large-cap company like UNH, seven-figure buys are even better.
With UNH shares back over $300 in early morning trading, up from a low of $248 last week, about a 20% move, however, the easy part of the share rebound is over. And with the market looking a bit weaker following the Moody’s downgrade, it isn’t quite the oversold-bounce opportunity that it was last week.
Plus, any fresh news about nefarious activities at the company could send shares lower. But once UNH gets past the DOJ investigation, if there’s a clean bill of health, it could be ready for a steadier trend higher.
~ Andrew
P.S. Addison is still traveling a bit early this week, and next week I’ll be on the road, attending the Bitcoin Conference.
Bitcoin hit a one-month high Sunday night over $106,000, butlooks ready to pull back today following the Moody’s news. Gold is showing some strength in early-morning trading. This week in general will likely be a more defensive one. Stay cautious out there.
