Moody's Gives The Thumbs Down To US Debt Which Is Two Thumbs Up For Gold And Gold Stocks

To close out the week, Moody’s downgraded US debt on Friday afternoon, which was “rejected” by the Trump team, while I thought Moody’s was being kind. Right away, supporters of Trump bemoaned that it was a political act, when it seems much more to me like they got a higher rating than they deserved because they are the US government.

If an individual or company had so much debt that the cost of servicing the debt is getting close to 30% of the revenue they bring in, they would have a credit rating in the dumps. Especially if they kept on spending in the way that caused their debt and cost of servicing their debt problems.

Pile on top of that $9.2 trillion of the debt has to be rolled over to much higher interest rates this year, on a debt that stands at nearly $37 trillion. But, facing these issues, the government wants to keep the spending insanity going and also increase the debt ceiling by $4-5 trillion.

I look at the US debt as a supply and demand quandary. There is unprecedented supply that is growing due to the debt that needs to be rolled over, the spending addiction of politicians (on the left and right) that will increase the deficit, and rapidly increasing cost to service the debt.

On the demand side, just when America needs foreign buyers to support the debt market, Trump has alienated every trading partner. Including those that are sitting on tons of US debt, with his trade war with every trading partner that are also potential buyers of US debt.

I hear the counter argument that foreigners have no choice but to continue keeping the house of cards afloat. And of course the proviso that they also have to keep supporting it because it is the most liquid market. But, there comes a point, which is where we are now, that it is throwing good money after bad.

At the end of the day, America is in a Death Spiral of Debt and the straw that is breaking the debt camel’s back is the cost of servicing the debt and the massive supply of debt.

The only way for America to stop having their credit rating drop, is either to slash spending or back the debt up to the tune of around 50% with gold giving it serious backing with the soundest money. I highly doubt the politicians will slash spending, so the best solution is to back it with gold in a meaningful way, not by a percent or so like it is now.

That is the best solution, the other solution is some form of default on the debt. Apparently, Bessent has already mentioned doing some sort of default on foreigners by forcing them to switch their debt to longer term paper at a fixed price that they probably won’t like the term or the yield.

This should scare every foreign holder to blow off all their US debt asap or face a forced painful default. Talking about some sort of a default on foreign holders, while also slapping tariffs on them is not a way to make friends and influence foreigners to keep the house of cards afloat.

I doubt Moody's downgrade of US debt is going to make foreigners feel warm and fuzzy. Precisely when their buying is needed the most. If foreigners turn into sellers and reluctant buyers, when the supply of US debt is so massive, who is going to support the US debt market? The buyer of last resort.

It is all on the shoulders of the American government pension plans, American institutional investors and Americans. We will find out how much paper they can eat very soon because $6.5 trillion has to be rolled over by the end of June. Cue up the QE.

In the past, I heard folks say that Janet Yellen loaded up the short term duration on the debt, with Trump supporters saying it was to set Trump up for failure. She started doing this long before it looked like Trump would win, so that reasoning sounds iffy. What is not talked about by many is that maybe she had no alternative.

When making a market, to set the price requires considering the supply and what buyers are willing to pay and the duration they want for the debt. I’m no fan of Janet Yellen from her time leading the Fed or Treasury where she made plenty of missteps and ridiculous comments about the economy. But, in the case of loading up the debt in the short term probably had a lot to do with buyers only interested in the short term end of the curve.

Can you blame them? Certainly not considering the massive supply of debt, the Death Spiral of Debt, cost of servicing the debt and spending addiction of politicians. Loading up on long duration debt, with these issues doesn’t look like a wise investment strategy, no matter how liquid the market is. The Death Spiral of Debt and the cost of servicing the debt is setting up a very bad problem well into the future.

Moody’s actions to downgrade the debt is going to make a lot of investors inside and outside America review their holdings of US debt and affect their buying plans. With the debt crisis, and economic uncertainty due to Trump’s trade war, I can see the probability that foreign investors will sell more of their US debt and go on a buyer’s strike. Hello Powell.

Gold is a much better parking spot for foreign investors to seek shelter from the broken debt and fiat currency system.

Generalist retail investors and institutions in the West haven’t really got the memo yet when it comes to the bullish scenario for gold. It won’t take long for the institutional investors in the West to start getting more bullish on gold, and gold stocks, when they read about how hedge fund manager David Einhorn (and others) are crushing it when comparing their performance relative to the Wall Street stocks.

Institutional money follows where they can outperform because that is what gets funds flowing into their firms. Those not in gold and gold stocks are going to start having those uncomfortable questions from wealthy investors about how much exposure to gold and gold stocks they have, and if they have the wrong answer, which is none or very little, the funds will flow out of their firms.

In Closing

Gold miners are making nothing but money due to producing gold for a lot lower than the price of gold which makes them free cash flow machines. Meanwhile, leaders of Wall Street stocks are unable to give guidance on their outlook for their companies due to economic uncertainties.

Gold is in a perfect storm to go much higher, which will drive free cash flow for gold miners, and significantly higher cash than debt on their balance sheets. Gold miners are primed to have a strong rally after the Moody’s downgrade to US debt as gold will perform very well post the announcement.

US debt looks to go under pressure, driving the yields up as the effects of the trade war become more problematic. I can see the high likelihood that Wall Street stocks and US debt are going to be under pressure, which will also put pressure on the US dollar.

Buckle up gold and gold stock bulls, the golden coiled springs are about to be released. Not only for the gold miners, but also for the gold mine developers with high-quality projects and the gold explorers with important discoveries.

All the best,

Allan Barry Laboucan