Market uncertainty has suddenly increased.
On the early morning of November 11th Beijing time, global rating giant Moody's suddenly announced that it would downgrade the outlook for the United States' sovereign credit rating from "stable" to "negative". Moody's is a global rating giant, and among the top ten shareholders, Berkshire Hathaway, controlled by Warren Buffett, is the largest shareholder.
In response, the US Treasury Department said in an emergency that it did not agree with Moody's downgrade of the US sovereign rating to a negative outlook. The US economy remains strong, and the US treasury bond bond is the safest and most liquid asset in the world.
International rating agencies are often regarded as "gatekeepers of the financial market". Among the three major rating giants in the world, Standard&Poor's downgraded the US rating from the highest AAA to AA+as early as 2011; In August of this year, Fitch also downgraded the US credit rating from the highest level.
Recently, Ken Griffin, founder and CEO of Citadel, warned that the current US fiscal deficit is unsustainable and that the Federal Reserve can continue to avoid default by printing money, but the consequences for the economy will be devastating. As of the end of 2022, the management scale of the Castle Hedge Fund reached $62.3 billion (approximately RMB 450 billion).
Black Swan Assault
On the early morning of November 11th Beijing time, after the US stock market closed, Moody's suddenly announced that it would downgrade the outlook for the US sovereign credit rating from "stable" to "negative", but still maintain the highest rating of Aaa.
Moody's
Moody's stated in its announcement that the downward risk of US fiscal strength has increased and may no longer be fully offset by its unique credit advantages. In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenue, Moody's predicts that the US fiscal deficit will remain very large, significantly weakening debt sustainability. The ongoing political polarization within the US Congress increases the risk of not being able to reach a consensus on slowing down the decline in government debt affordability (the required plan).
It is worth mentioning that if the US Congress cannot reach an agreement on financial appropriations, the existing short-term fiscal bill will expire on November 17th (next Friday). This means that the US government may face the risk of a 'shutdown'.
Regarding Moody's decision, Vice Minister of the Treasury Wally Adyemo stated in a statement that although Moody's maintained the Aaa rating of the United States, the Treasury does not agree with its decision to shift its outlook to "negative". Adeyemo stressed that the US economy is still strong, and the US treasury bond bond is the safest and most liquid asset in the world.
The time point announced by Moody's is after the US stock market, so the capital market has not yet reacted to this bearish news. The overnight US stock market closed, with the three major indices collectively closing higher, with the Nasdaq up 2.05%, the S&P 500 up 1.56%, and the Dow up 1.15%. Technology giants generally rose, while Microsoft rose 2.5% to a new historical high; Netflix, Tesla, Apple, NVIDIA, Amazon, Meta, and Intel all rose by over 2%, while Google rose by over 1%.
Why did Moody's suddenly take action?
International rating agencies are often regarded as "gatekeepers of the financial market". Among the three major rating giants in the world, Standard&Poor's downgraded the US rating from the highest AAA to AA+as early as 2011; In August of this year, Fitch also downgraded the US credit rating from the highest level.
Sovereign credit ratings reflect a country's debt default risk. The higher the rating, the lower the borrowing cost, and vice versa. In addition, sovereign credit ratings are an important reference for investor decision-making, and the higher the rating, the stronger investor confidence, and vice versa.
The rating reason given by Moody's is that the sharp rise in the yield of US treasury bond bonds this year has increased the existing pressure on the affordability of US debt; In the absence of policy action, Moody's expects the debt sustainability of the United States to further, steadily, and significantly decline to a "very weak" level compared to other high rated sovereigns.
Moody's pointed out that the Fed's interest rate hike will continue to drive up the US government's interest expenses in the coming years. Meanwhile, although the government's income base will grow with the overall economy, in the absence of specific policy actions, this will be much slower than the growth rate of interest expenses.
Moody's predicts that by 2033, the proportion of federal interest payments relative to income and GDP will increase from 9.7% and 1.9% in 2022 to approximately 26% and 4.5%, respectively. These forecasts take into account Moody's expectations of higher long-term interest rates. It is expected that the average annual yield of 10-year treasury bond bonds will reach a peak of about 4.5% in 2024, and eventually stabilize at about 4% in the medium term.
For reserve currency countries like the United States, debt affordability - not debt burden - determines fiscal strength. Therefore, in the absence of measures to limit the size of the fiscal deficit, fiscal strength will increasingly affect the credit record of the United States.
Moody's emphasized that due to the weakening of fiscal strength, political differences may further limit the effectiveness of policy making and prevent measures from slowing down the deterioration of debt sustainability.
450 billion giant warning
On November 9th local time, Ken Griffin, founder and CEO of Citadel, stated that the world is currently facing turbulence and structural changes, which will drive "de globalization" and may lead to decades of high inflation.
Billionaire Ken Griffin mentioned recent geopolitical conflicts at the meeting and said that the peace dividend has clearly come to an end. "We may see higher real interest rates, but we may also see higher nominal interest rates
He further added that this would have an impact on the financing costs of the US deficit, as the government did not consider such high interest rates one day when we spent heavily and caused a $33 trillion deficit. According to the data previously disclosed by the US Treasury Department, the US debt exceeded 33 trillion US dollars, equivalent to 122% of the US GDP.
Griffin said that US fiscal spending needs to be rectified because "government level spending is like a drunken sailor. He warned that the current US fiscal deficit is unsustainable, and although the job market is still relatively strong, consumers are deeply aware that 'something is not quite right'.
He said that the Federal Reserve can continue to avoid defaults by printing money, but the economic consequences will be devastating. "Once we start printing dollars to deal with potential defaults, our economy will fall into a serious recession
It is worth mentioning that in 2022, Castle Investment generated a net income of $16 billion for fund holders, setting a new record for the highest annual return of hedge funds in history. At the same time, with this outstanding performance, Castle Investment surpassed Bridgewater Fund and became the world's highest cumulative return hedge fund, while also breaking the industry's historical single year post fee return record.
The castle focuses on multi strategy products, generating profits through extensive data analysis and high-frequency trading. At present, in addition to its hedge fund business, it also has Castle Securities, which focuses on market makers. As of the end of 2022, the management scale of the Castle Hedge Fund reached $62.3 billion (approximately RMB 450 billion).
