I have a lot of respect for Warren Buffett. As Nilus has noted before, he’s one of the world’s best long-term investors. He has a knack for buying low and selling high. And his Berkshire Hathaway holding company has been a great multi-year performer for investors.
It has amassed stakes in everything from the Geico insurance firm to the manufactured home company Clayton Homes to the Dairy Queen restaurant chain.
But Buffett can’t levy taxes on Americans. He can’t wage war in far corners of the world. He isn’t responsible for your Social Security checks. He doesn’t operate the National Park System or make sure the drugs we take are safe. That’s the job of the federal government.
And yet, a remarkable thing occurred recently in the bond market …
Berkshire’s cost of borrowing fell BELOW Uncle Sam’s! Ditto for Procter & Gamble, the company behind brands like Tide detergent and Charmin toilet paper … Lowe’s, the home improvement retailer … and Johnson & Johnson, the firm that makes Band-Aids, medical devices, and baby shampoo, according to Bloomberg.
Bottom line: Bond investors are now viewing Treasuries as riskier than a vast array of corporate debt. They’d rather own bonds backed by sales of toilet paper than the full faith and credit of the United States. If that’s not a sign of how low we’ve sunk, I don’t know what is!
The Proof Is in the Pudding —
The Daily Verdicts Handed Down
By Investors Worldwide
Treasury Secretary Tim Geithner recently sat in front of ABC News cameras and made a solemn pledge. Asked about whether the U.S.’s credit rating would drop below AAA, he said, “Absolutely not.” For emphasis, he added, “That will never happen to this country.”
You know what though? Talk is cheap. Policymakers can bloviate all they want. But the bond market renders its verdict on the credit quality of everyone from municipalities to corporations to governments each and every trading day.
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| Buffett’s Berkshire Hathaway can now borrow money for less than the U.S. Treasury can. |
The relative behavior of different types of bonds — and the credit default swaps that reference them — tells you everything you need to know about who is really in good shape, and who isn’t. And right now, the trading action proves the U.S. is guilty of running a profligate, debt-ridden operation, one that’s in worse shape than some American corporations.
The evidence? Bloomberg data shows the yield on Berkshire’s notes due in February 2012 dropped to 0.89 percent, 3.5 basis points below comparable-maturity Treasuries, in mid-March. Berkshire is officially rated AA+ by Standard & Poor’s, one notch below AAA.
Procter’s August 2012 notes slipped to 1.12 percent, beating Treasuries by 6 basis points. The consumer products company is rated AA-, three notches below the U.S.
J&J? Its August 2012 notes yielded 3 basis points less than Treasuries as of mid-February. Unlike the other companies, it is rated AAA. But still, you’re talking about an astounding thing here.
The Market Is Speaking.
Will Washington Listen?
Look, corporations don’t have the vast holdings, legal standing, or massive resources of sovereign nations. Their fortunes can rise and fall with the economy. They can go broke. Their bonds almost always trade with a yield “spread” to Treasuries to account for those additional risks.
But that’s starting to change …
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| U.S. policymakers are scaring investors away from Uncle Sam’s debt. |
Because of the crazy “borrow, print, spend” policy here in the U.S., investors are backing away from sovereign debt and gravitating toward corporate securities. The auctions of $42 billion in 5-year Treasury notes and $32 billion in 7-year notes this week were stark examples of Uncle Sam’s fading fortunes. Bidding was weaker than expected and the Treasury was forced to offer generous yields to get the money it desperately needs. The message from the markets is loud and clear: Get your financial house in order … or we’ll FORCE you to do it!
Fortunately as a Money and Markets reader, you’ve been prepared for this day for some time. All the way back in December 2008, I proposed that long-term Treasuries were swept up in the “biggest bubble of all time.” I said that rising deficits, massive bailouts, and the out-of-control Fed would spook investors. Treasuries began plunging in price within days.
In mid-August of last year, I talked about the “never ending waves of debt” issuing forth from Washington. My explicit warning: “We are continuing to borrow and spend, borrow and spend, with no short-term or long-term plan on how to get all that debt under control.”
Then several weeks ago, I highlighted the debt market woes in the U.K. and postulated that the U.S. would soon find itself in the same boat. Sure enough, now our nation’s debt trades more weakly than securities backed by sales of manufactured homes and disposable razors. Fantastic, eh?
My continuing suggestion: Consider avoiding the debt of less credit-worthy entities (i.e. Uncle Sam) and sticking with those who deserve your money. If that means avoiding government debt and buying high-grade corporates instead, so be it.
Until next time,
Mike
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