From AAA to AA+ for the US of America. is it really SO bad ?

Q: What’s the difference between AAA and AA+? That doesn’t sound so bad.

A: It’s not so bad — and there’s not much difference. Technically, AA+ is considered “high grade” credit, while AAA is “prime.” The likelihood of getting paid back by a AA+ credit is considered “very strong,” while a AAA credit’s likelihood of paying you back is “extremely strong.” See the difference? Me neither.

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And the U.S. is a special case, given its status as the world’s largest economy and printer of the world’s reserve currency. If your personal credit score falls, then you will almost certainly have to pay more to borrow. The U.S. can get away with a slight credit-rating downgrade without having to pay more to borrow. In fact, many other large, developed economies, including Japan, Canada and Australia, have lost AAA ratings in the past and not had to pay more to borrow in the long run.

Q: Luxembourg is rated AAA. Is the U.S. really a worse credit risk than Luxembourg?

A: No way. Luxembourg is a great country and a perfectly sound credit risk, but it lacks many of the advantages of the U.S., including the aforementioned economy and reserve currency, along with a very large printing press for that currency. If anything, this downgrade exposes some of the other discrepancies in ratings around the world. Should bonds issued by the European Financial Stability Facility, the entity set up to help bail out European sovereigns, really have a AAA credit rating, for example?

Q: Won’t some investors be forced to sell because of even this small downgrade?

A: Maybe, but not very many. Given the liquidity and relative safety of Treasurys, many regulators and money managers put Treasurys in a special category apart from rating considerations. Other managers are considering tweaking their rules to allow them to keep Treasurys.

U.S. banking regulators have confirmed that the downgrade will not force banks, which have big Treasury holdings, to raise any more capital as a cushion against losses. Short-term Treasury ratings weren’t affected, so money-market funds won’t have to sell

Q: What about foreign investors? Surely they’ll sell.

A: Probably, but they may not sell much. They’ve been trying to diversify their holdings for years, but they keep running up against an impregnable hurdle: They’ve got nowhere else to go. For better or worse, Treasurys are the largest fixed-income asset class in the world, by far, and the likelihood of default is next to nothing. The dollar is, for now at least, the world’s reserve currency, meaning foreign central banks will have to keep buying Treasurys. There’s really no other alternative available.

Q: What is the likely effect on interest rates, then?

A: Very hard to say, given all the cross-currents affecting markets right now. In a perverse sense, this downgrade has come at just about the best possible time for the U.S., despite the turmoil in the markets and anxiety about the economy. Those very uncertainties have driven investors around the world — including foreign central banks — to the safety of U.S. Treasurys, pushing U.S. borrowing costs to nearly their lowest levels in generations. So any increase in rates will come off a very low base. If interest rates rise half a percentage point, for example, that might put 10-year Treasury yields at 3% — still an extraordinarily low rate.

What’s more, the market has been bracing for this downgrade for a while, particularly on Friday, when rumors of it were widespread. It’s possible that most of the increase in yields has already happened. In any event, the history of Japan, et al, suggests that a downgrade might have no long-term impact on borrowing costs at all. Investors will likely respond more to inflation pressures, the direction of short-term interest rates and economic growth than to what one or more rating agencies say.

Q: Will this affect corporate-bond ratings or borrowing costs?

A: Not for most. Several AAA-rated insurance companies and some other financial firms with ties to the government are at risk of a downgrade, S&P has said. Most other corporate borrowers will be unaffected. Only four U.S. non-financial companies — Automatic Data Processing, Exxon Mobil, Johnson & Johnson and Microsoft — have AAA ratings. They will not be downgraded as a result of the U.S. downgrade.

Like the government, companies — including those with less-than-AAA ratings — have been borrowing at the lowest levels in decades. That is unlikely to change as a result of the U.S. downgrade. If anything, they could benefit as investors look for higher-yielding alternatives.

Q: How about the mortgage market?

A: S&P has warned it could downgrade government-backed mortgage agencies Fannie Mae and Freddie Mac, and we’ll have to take them on their word for that. Fannie and Freddie were effectively nationalized during the crisis and have the backing of the U.S. government. In theory, their downgrade should raise rates on mortgages across the country. But mortgage bonds have been in even hotter demand from investors than Treasurys lately, given their higher interest rates and government backing.

Kevin Cavin, mortgage strategist at Sterne Agee in Chicago, says the mortgage market may have already braced for the downgrade. While the unsecured debt of Fannie and Freddie might suffer, Mr. Cavin suggests, mortgage bonds, which have actual houses backing them as collateral, could stay in high demand.

In any event, mortgage rates have fallen to record lows recently, without sparking much of a boom in refinancing or new-home purchases. That means any small increase in mortgage rates will likely have little effect on the housing market.

Q: What about the muni market?

A: Here’s one area where there could be some real turmoil, though the long-term effects are difficult to discern right now. There could be widespread downgrades of municipalities that lean on federal backing, which could hit the muni market. The size of this impact, and its duration, remain to be seen, however. Just as Treasurys benefit from a scarcity of competitors, investors looking for relatively safe, tax-exempt bonds don’t have many alternatives to munis. That’s why many muni analysts think the damage could be small.

Q: Anything else?

A: There’s a grab bag of assorted debt that could get downgraded now, S&P has warned, including bonds issued under government lending programs established in the wake of the financial crisis, some ETFs, hedge funds and more. It’s difficult to say yet how far-reaching this will be or how much chaos it could cause.

Q: Any effect on the stock market?

A: This could cause some short-term turmoil as investors try to assess the impact, but that’s no sure thing. Some nations’ stock markets have quickly shrugged off downgrades in the past, notes Jason Goepfert at Sundial Capital Research, while others have not, so history is not much of a guide.

Coming just after the worst week for markets since the financial crisis in 2008, the timing for U.S. markets couldn’t be much worse. That said, there has been some warning that this was coming. And if investors determine the long-term effects will be manageable, any short-term market losses could be made up quickly. Like Treasurys, stocks will probably ultimately be affected by more than the rating agencies.

Q: Does anybody even take the rating agencies seriously? Didn’t they help cause this mess in the first place?

A: A downgrade is no doubt a psychological blow, a rebuke to the nation. Confidence in U.S. policy makers was already flagging, and this will not help. What’s more, some investors are a captive audience for the agencies, having to change their strategies based on what the agencies say. But it is true that the agencies contributed to this mess by failing to properly rate the mortgage-backed securities that were at the heart of the financial crisis. The government is so deeply in debt partly because of the damage done by that same crisis. The image of the rating agencies took a serious blow, and S&P arguably has not helped its reputation much with its handling of this downgrade.

If anything, this could lead policy makers and investors to take even greater strides away from their dependence on rating agencies, a process that began in the aftermath of the crisis.

Mark Gongloff from the Wall Street Journal contributed to this article. Reproduced with permission.

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A bizarre story of hyper inflation ! Emerging economies can take a lesson perhaps ?

How to Turn 100 Trillion Dollars Into Five and Feel Good About It

The Highest-Denominated Bill Ever Issued Gives Value to Worthless Zimbabwe Currency


A 100-trillion-dollar bill, it turns out, is worth about $5.

Associated Press

Above, a man in Harare, Zimbabwe, carried cash for groceries in 2008.

That’s the going rate for Zimbabwe’s highest denomination note, the biggest ever produced for legal tender—and a national symbol of

monetary policy run amok. At one point in 2009, a hundred-trillion-dollar bill couldn’t buy a bus ticket in the capital of Harare.

But since then the value of the Zimbabwe dollar has soared. Not in Zimbabwe, where the currency has been abandoned, but on eBay.

The notes are a hot commodity among currency collectors and novelty buyers, fetching 15 times what they were officially worth in circulation. In the past decade, President Robert Mugabe and his allies attempted to prop up the economy—and their government—by printing money. Instead, the country’s central bankers sparked hyperinflation by issuing bills with more zeros.

The 100-trillion-dollar note, circulated for just a few months before the Zimbabwe dollar was officially abandoned as the country’s legal currency in 2009, marked the daily limit people were allowed to withdraw from their bank accounts. Prices rose, wreaking havoc.

The runaway inflation forced Zimbabweans to wait in line to buy bread, toothpaste and other essentials. They often carried bigger bags for their money than the few items they could afford with a devalued currency.

Today, all transactions are in foreign currencies, mainly the U.S. dollar and the South African rand. But Zimbabwe’s worthless bills are valuable—at least outside the country. That Zimbabwe’s currency happened to be denoted in dollars has amplified appeal, say currency dealers and collectors, particularly after the global financial crisis and mounting public debts sparked inflationary fears in the U.S.

“People pick them up and make jokes about when that’s going to happen here,” says David Laties, owner of the Educational Coin Company, a currency wholesaler based in Highland, N.Y.

Dealers prescient enough to buy Zimbabwe’s biggest notes while they were in circulation are now taking their investment to the bank. Mr. Laties spent $150,000 buying bills from people in South Africa and Tanzania with experience moving currency and other clandestine cargo, including migrants, across Zimbabwe’s borders. Sensing that Zimbabwe’s last dollars would be “the best notes ever” on the collector’s market, he even fronted $5,000 to someone who approached him over the Internet.

“It worked out,” he says. “I got my notes.”

Frank Templeton, a retired Wall Street equities trader, bought “quintillions of Zimbabwe dollars” through a broker from Zimbabwe’s central bank. On eBay, he now does a brisk trade in the bills from his home in the Hamptons, on New York’s Long Island. “I like to say Warren Buffett made a lot of people millionaires, but I’ve made more people trillionaires,” Mr. Templeton says. The dealer paid between $1 and $2 for each of the bills in several purchases over about a year, and now sells them for around $5-$6 apiece.

House Budget Committee Chairman Paul Ryan (R., Wis.) and Stanford economist John B. Taylor are among the new owners of Zimbabwean bills. Each keeps one in his wallet, brandishing it at opportune moments as evidence of inflation’s most extreme possible ramifications. “No self-respecting monetary economist goes around without a 100-trillion-dollar note,” Mr. Taylor says with a chuckle.

Only Zimbabwe’s secretive central bank officials know the true figures, but dealers estimate that the regime printed roughly five million to seven million bills in the 100-trillion-dollar denomination. Based on the serial numbers and known supply of bills in the collector’s market, they believe only a few million were actually released.

Mr. Templeton and Mr. Laties say their stock is genuine because it came in unopened bricks of thousands of bills. Others guard against the small number of counterfeit Zimbabwean bills rumored to be in the market by studying the watermark, signature and serial numbers that distinguish genuine bills.

Most pristine bills are already in the hands of wholesalers or dealers, meaning merchants looking to stock up now are having a difficult time. Some traders suspect officials at Zimbabwe’s central bank are still selling surplus bills to middlemen, but no traders said they had direct access to the bank themselves.

“For something that was printed in the millions, it’s hard to actually get your hands on,” says Andrew Ericson, an eBay currency merchant in Hawaii.

One Reserve Bank of Zimbabwe official says that defunct notes aren’t being sold, though many remain stashed in its vaults and that some bank employees may have huge stores at home.

Though serious collectors are only interested in uncirculated currency—for the same reasons that baseball card or action-figure enthusiasts will pay a premium for pieces in mint condition—the less pristine bills are getting a second act in Zimbabwe as souvenirs for foreign visitors.

At a shopping center in Harare popular with tourists, Gamuchirai Kaparadza sells Zimbabwean bills alongside clay pots and soapstone carvings. He says the bills go for between $1 and $10, depending on a customer’s bartering skills. “The 100-trillion-dollar note sells like hot cakes,” says Mr. Kaparadza. “But it is also hard to get these days because I think more people are realizing they can make some bucks selling it.”

A German tourist who failed to get the coveted 100-trillion note was happy to pay $5 for a 100-billion-dollar note instead. “It’s still huge,” she said.

Mr. Kaparadza peddles his bicycle through Harare’s poor and working-class neighborhoods, going door-to-door trying to buy people’s defunct Zimbabwe dollars. Because the government never attempted to collect the bills or allowed people to exchange them, many still have huge stashes squirreled away at home.

During one such excursion earlier this month, an elderly woman accused Mr. Kaparadza of trying to con her out of valuable currency. “You are a thief. President Mugabe says we will get our money!” she said before slamming the door in his face.

Indeed, the 87-year old Mr. Mugabe has declared that the Zimbabwe dollar will soon return, but members of his awkward unity government are unconvinced. Prime Minister Morgan Tsvangirai told a farmer at a public rally last year that he should use the bricks of bank notes under his bed “to fertilize his fields.”

—Peter Wonacott  contributed to this article.

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Bonds Stocks & Goals Oh My!

I plan on reading Moshe Milevsky’s book “Are you a Stock or Bond?” because I found the title and topics fascinating. When we talk about setting financial goals, it is imperative to ask Milevsky’s question: “Am I a stock or bond?”

One could define the “bond” worker as someone whose income is based on either an hourly wage or salaried employee with little or no bonus structure. The “bond” worker is paid at regular intervals like clockwork. Monetary benefits may include a small bonus or a contribution to a retirement plan. The “bond” worker can, with a high degree of certainty, estimate what their annual income will be at the end of the year. Predictable, stable and expected.

A “stock” worker is someone whose pay is more variable. The “stock” worker may be a salesperson paid on commission or a small salary with incentives for high performance. The individual may also be a trader, venture capitalist or entrepreneur. Plenty of downside, but fabulous upside potential. The “stock” worker may have a difficult time predicting their annual income. Unpredictable, unstable and unexpected.

Financial planning for the “stock” worker may be more difficult than the “bond” worker. The “stock” worker needs to place a greater amount of focus on disciplined spending compared to that of the “bond.” Due to the unpredictable cash flow of the “stock’s” profession, periods of underperformance coupled with a high life style may result in financial ruin. The “bond” worker on the other hand should have greater relative ease in the ability to time cash flow and expenditure. For the “bond”, there is a high degree of certainty of what will appear on the next pay check compared to what will appear on the next credit card bill. Yet, the “bond” worker can’t ignore spending habits. Spending beyond reasonable means today will require future sacrifices to avoid financial problems.

So why is it that so many “stocks” and “bonds” end up with little to show for their efforts? My experience tells me it’s primarily due to a lack of planning. Not having clear, written financial goals is like setting sail in the ocean without a rudder to steer you. You may have the best looking, best equipped boat on the water, but without a rudder, you don’t know where the wind and currents will take you. The boat may end up on a nice sun soaked beach in the Caribbean or run aground on some rocky shoals of the cold North Atlantic.

Goal setting can be either a frustrating or exhilarating experience. The difference is often found in how well past efforts toward fulfilling goals have fared. Successful goal setting strategies, like successful financial planning strategies, are not a secret. Last month I suggested writing and prioritizing a a list of goals. Here are some tips to help you succeed.

  1. Goals should be specific. Goals without specifics are vague wishes that are not likely to come to fruition. The goal of “I want to make more money” is as powerful as a daydream. Nice to think about but most likely will never come to fruition. Goals should have specific time frames, dollar amounts and other easily identifiable way points.
  2. Goals should be achievable. If you are a “bond” worker and want to make $1 million dollars by next year but your income today is only $50,000, be prepared for a lot of work and major changes in your life to accomplish this.  Unrealistic short-term goals should be avoided.
  3. Goals should inspire. Every goal that was written down should create a charge of energy inside you every time you read them. If not, you didn’t come up with the right goal. Inspiration is the fuel behind determination and perspiration.
  4. Goals should be evaluated and updated. Once written down, life happens and goals may change. More importantly what you are doing to achieve your goals may need to be re-evaluated. Your course may need to be tweaked or completely scrapped and recalculated based upon life’s unpredictable circumstances.
  5. Goals achieved should be rewarded. Most people are pretty tough on themselves when they fall short of a goal. Reward yourself for achieving a goal, no matter how small, creates positive momentum. The more success you achieve in goal setting and accomplishment, the bigger your future goals can become.

I am of the fervent belief that everyone can achieve goals which are inspirational, specific and realistic. Life changing goals on the other hand require a larger skill set. Not everyone has the current tools necessary to achieve these types of ambitious goals. But like everything else I have discussed up to this point, there is no magic formula, secret to divulge or tapes to buy in order to obtain these tools for great accomplishments. All it takes is desire. A desire to learn, to change, to set a new course. Do you have the desire? If so then dream big!

Edward Gjersten II of Mack Investment Securities, Glenview IL contributed to this article.

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