Downgrade? Buffett says U.S. merits AAAA rating

Oracle roundly disagrees with S&P's lowering of Uncle Sam's credit rating: Bill Gross sees it differently

Aug 8, 2011 @ 12:10 pm

(Bloomberg News)
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(Bloomberg News)

Bill Gross, manager of the world's biggest bond mutual fund, said Standard & Poor's showed “spine” by cutting the U.S. debt rating, contradicting Warren Buffett and Legg Mason Inc.'s Bill Miller, who said the rating company erred.

“I think S&P has demonstrated some spine; they finally got it right,” Gross, who has been critical of Treasuries for months, said in a Bloomberg Television interview with Tom Keene yesterday. The U.S. has “enormous problems,” he said, referring to the country's mounting debt.

S&P on Aug. 5 lowered the U.S. one level to AA+ while keeping the outlook at “negative” as it becomes less confident Congress will end Bush-era tax cuts or tackle entitlements. The U.S. merits a “quadruple A” rating, Buffett, 80, said in an interview with Betty Liu of Bloomberg Television. Legg Mason's Miller said S&P was “precipitous, wrong and dangerous” in lowering the rating after last week's stock market selloff.

Weakening economic data has prompted concerns about the U.S. recovery. Nouriel Roubini, chairman of Roubini Global Economics LLC in New York, said in an interview with Tom Keene yesterday that the U.S. may be headed into a “double-dip recession.”

BlackRock Inc., which manages $3.6 trillion in assets, said in a statement that the Federal Reserve “will want to continue supporting the recovery in any manner it can in light of an extraordinarily anemic real growth rate” this year.

‘Dirty Shirts'

Gross, 67, has said that Treasuries are unattractive because yields don't offer enough compensation for the risk of inflation. In his monthly investment outlook, published last week, Gross said investors should buy assets of countries with “cleaner dirty shirts” and higher real interest rates, including Canada, Mexico, Brazil and Germany.

His Pimco Total Return Fund (PTTRX), the world's biggest mutual fund at $245 billion in assets, is lagging 56 percent of rivals this year as U.S. government debt rallied amid the European sovereign crisis and concern that the global economy is slowing. The fund has returned 8.7 percent on average over the past five years, beating 98 percent of its peers, according to data compiled by Bloomberg. Newport Beach, California-based Pimco managed $1.3 trillion in assets as of March 31.

‘Vulnerable'

Treasuries rallied today as tumbling stock markets sparked demand for the safety of government debt. The yield on the benchmark 10-year bonds fell 20 basis points to 2.36 percent at 10:37 a.m. in New York, according to Bloomberg Bond Trader prices. Bond yields move inversely to prices. The S&P 500 Index (SPX) fell 47.50, or 4 percent, to 1151.88.

Gross more than doubled Total Return's investments in non- U.S. developed countries to 13 percent in June from 6 percent in April, according to data released last month. The fund had 11 percent of its holdings in emerging markets. It holds about 9 percent of Treasuries, up from 8 percent in June. In July 2010, the fund had 54 percent of its holdings in government-related debt, a category that included Treasuries.

With the economy showing sign of weakness, Gross said the dollar remains “vulnerable” to further losses. For the global economy to start improving, China would need to let its currency appreciate, he said in the interview.

Yuan Gains

China's yuan strengthened the most since April, touching a record high, after the downgrade. The U.S. should avoid letting the dollar weaken or taking fresh monetary steps that may worsen the currency's depreciation, the Xinhua News Agency said in a commentary.

The People's Bank of China set its daily fixing 0.23 percent stronger at a record 6.4305 per dollar, the biggest advance since November 2010. The currency is allowed to trade up to 0.5 percent on either side of the official rate.

Buffett said in the interview with Betty Liu that he doesn't expect a double-dip recession in the U.S.

“Financial markets create their own dynamics, but I don't think we're facing a double-dip recession ,” said Buffett, chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc. “Clearly what stock markets do have is an effect on confidence, and this selloff can create a lack of confidence.”

No Alternative

Miller, who agreed with Buffett's assessment, said the U.S. is the “most productive economy in the world.”

“There simply is no alternative to the dollar as the global reserve currency and as the instrument of global trade,” Miller wrote.

Miller is best known for outperforming the Standard & Poor's 500 Index for a record 15 consecutive years through 2005. He trailed the S&P for four out of the next five years as bets on financial stocks and a recovery in the economy didn't pay off. Miller's $3.1 billion Legg Mason Capital Management Value Trust (LMVTX) has lost 8.1 percent this year, compared with a 3.6 percent decline for the index, according to data compiled by Bloomberg.

Stocks plunged last week amid signs the U.S. economy is slowing and speculation that Europe will fail to contain its sovereign-debt crisis. Reports on manufacturing and consumer spending trailed economists' forecasts.

The U.S. cut, announced after the close of trading in New York, was prompted by rising public debt and “greater policymaking uncertainty,” S&P said. The U.S. has the top credit rating at both Moody's Investors Service and Fitch Ratings.

Sticking With Treasuries

Buffett said he doesn't rely on the views of ratings firms when buying and selling securities. Berkshire is the biggest shareholder of Moody's Corp.

Money managers BlackRock, the world's biggest asset management firm, Western Asset Management Co., the bond unit of Baltimore-based Legg Mason, and Northern Trust Corp. have said the S&P's rating cut won't change their view of Treasuries.

Peter Fisher, head of fixed income at BlackRock, said Treasuries remain the most liquid and transparent investments even after they were downgraded by S&P. The U.S. will probably maintain that position over the next years, he said.

“The fact of the downgrade won't change in the near term how we use and think of U.S. Treasuries,” Fisher said in a phone interview from New York. Treasuries “will still be the hedging vehicles of choice,” for investors looking to reduce risk in their portfolios, he said.

Money Funds

Moody's and Fitch affirmed their AAA credit ratings on Aug. 2, the day President Barack Obama signed a bill that ended the debt-ceiling impasse that pushed the Treasury to the brink of default.

The S&P downgrade won't have an impact on money-market funds as the ratings company didn't lower the top grade it gives to U.S. short-term debt, Fisher said. Money funds are required to keep 97 percent of assets in top-rated short-term securities under Rule 2a-7 of the Investment Company Act of 1940

Stephen Walsh, chief investment officer at Western Asset, said that funds at the firm won't change the way they invest because of the downgrade.

“Our conversations with central banks and foreign investors show that they won't view Treasuries differently,” Walsh said in an interview.

Gross said if the U.S. wants to revive the economy by using government spending, it needs to target investment, not consumption.

“We need to become more productive as a global exporter,” Gross said.

--Bloomberg News--

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