It Will Take Time…
Just ask the Super Bowl winning New Orleans Saints.
In 1980, they did not win their first game until the next to last game of the season finishing with a franchise worst record of 1-15. During the season Saints fans would show up at the Superdome wearing paper bags over the heads, while carrying signs suggesting the team should be called the "Aints".
Although we don’t expect critics of current economic policy will don paper bags, we do expect that it will take time for the US economy to recover from the Great Recession. Headwinds created by the Greatest Deleveraging in the History of the World will continue to challenge the Greatest Releveraging being engineered by government stimuli the world over.
But, government efforts do have limits. Starting with small overlevered economies (Dubai, UAE), moving to medium sized and larger overlevered economies (Greece, Portugal, Spain) and even, probably, eventually impacting large overlevered economies (UK, Japan, US).
Of course, when you’re printing the world’s reserve currency, you’ve got a big advantage. But, the US was just put on notice by an entity it regulates (Moody’s) which noted that reduced deficits or solid economic growth will be a requirement to maintain a AAA rating. But, the most likely case remains historically high deficits coupled with slow, normative growth numbers.
Undoubtedly, now is neither the time to panic nor don those paper bags. We can expect the EU and/or the IMF and/or a group of world finance ministers to work through the issues posed by sovereign credit. The adjustments won’t be pretty, but there will be adjustments across world economies. And the results will not only challenge governments, but the very social fabric of some countries.
Importantly, it will be increasingly difficult for the world’s top rated countries to maintain that AAA rating. The fallout for insurer portfolios would be greater from a mindset change than from an actual credit risk standpoint. Historically, there is really very little difference in credit rating between AA and AAA. However, insurance investment laws and insurer policies were constructed with the idea that US government guaranteed (direct or implied) securities are the safest of investments. In a deleveraging world economy, credit risk must be constantly monitored and reconsidered.
What to do now?
Take a good hard look at what your company’s investment policy and portfolio is allowing in terms of credit risk.
For years, Strategic Asset Alliance has provided clients the opportunity to review credit risk in terms of both price degradation (due to ratings migration) as well as loss given default. Our Portfolio Credit Review uses a contingent claims approach that highlights that expected net income from credit instruments is practically never a ‘normal’ distribution. And consider all of this in light of policy limitations, as well.
It will take time for the full impact of the Greatest Deleveraging in the History of the World to be felt in all of its aspects. And it will take time for world economies to fully recover since, ultimately, deleveraging requires debt repayment ; which is most easily accomplished over time if it cannot be done all at once.
It took thirty years for the Saints to recover from the depths to the summit of their sport. World economies should take much less time than that to recover…but it will take time.
Meanwhile, just to be sure, on my next supermarket trip, I will request paper instead of plastic.
