The S&P Downgrades US Debt – What It Means to You …
Investors and Colleagues,
It’s been an interesting week for the US economy…
Last weekend, US Lawmakers and the president reached a compromise with the debt ceiling. An 11th hour agreement kept the government from defaulting on debt or shutting down key operations, and a corresponding spending plan lopped a couple trillion off the deficit over the next 10 years.
Equity markets initially responded positively, but an hour after the open, stocks were trading lower – setting the tone for the week. You see, once the debt issue was out of the way, traders began to look at the other economic challenges on the horizon – and the realization of these risks sent prices spiraling. On Thursday, the Dow dropped more than 500 points – the largest single day decline in years.
But that wasn’t the big event for the week. The most significant piece of news last week occurred after the market closed on Friday. As you probably heard, Standard & Poor’s downgraded the rating on US treasuries from AAA to AA+
What Does the Downgrade Mean for Us?
As consumers with families and businesses – and as real estate investors, it’s important to take a step back and determine exactly how this downgrade will affect our lives and our finances.
On one hand, the downgrade was not a total surprise. For years, we have seen deficit spending increase, we have seen the US struggle with debt, and we have seen the economic recovery run into resistance. The S&P downgrade simply formalizes what we have understood for some time. So conceptually, the downgrade really doesn’t change anything.
But on a practical level, the downgrade can have much more profound ramifications. The downgrade has a particularly sobering effect on the financial industry – because of the widespread ownership of treasury securities.
For a number of money market funds and bank reserves, there are specific rules in place as to what kind of assets can be held. These accounts may be required to hold all of their assets in AAA rated securities, or in some cases a particular percentage of their assets must be top rated holdings.
Now that certain treasuries are downgraded to AA+, these funds or bank holdings will be forced to liquidate their positions – and all of the selling will likely drive treasury prices lower.
As banks see the value of their reserves (typically held in US treasuries) decline, they will be under even more pressure to liquidate assets to reduce their risk. This means selling a major portion of their foreclosed real estate inventory – creating opportunity for buyers with available capital.
Buy When There’s Blood in the Streets
There’s an old trading axiom that says it is wise (and profitable) to buy when there’s blood in the streets. The concept is simple: When things look like they are as bad as they can get – and everyone around you is panicking – that’s precisely the right time to be buying.
Not only do you get a tremendous discount in price (panicked sellers are usually much more worried about getting RID of assets than about what price they can demand), but you also have the best days of recovery ahead of you.
So as we enter a very uncertain week for our markets, for our economy, for our nation; I want to encourage you to keep your wits about you, to look for opportunity, and to realize that significant challenges translate to significant opportunity.
Since Ashford Capital has been in constant communication with our contacts at regional and national banks, along with the FDIC, we’re going to be in a great place to negotiate this week. These institutions don’t have to take time to establish a relationship with us, because we have already inked deals with them in the past. Instead, we’re free to immediately begin talking business.
I hope that our success in this market will translate to your success as well. If you’ve been receiving my updates along the way but haven’t participated in a transaction yet, there is no better time than right now. If you’ve been involved in a deal already but have an interest in putting more capital to work, this could be a great time to add to your investment.
Could you give me a call this week? I look forward to working with you to grow your assets, improve your investment outlook, and add stability to your financial outlook.
Wishing you every success,
Matt