James Bianco: U. S. in Danger of Another Credit Downgrade

By on May 22, 2012

James Bianco - Bianco ResearchConsuelo Mack recently interviewed James Bianco, President, Bianco Research, to get his interpretation of the current investing landscape.

After an introduction by Mack regarding Bianco’s analysis of the impact of student loans on consumer credit (showing virtually no rebound in credit activity outside student loans) the interview began with a discussion of the European crisis.

Bianco said the problem that caused the European crisis (the euro) has not been fixed. Bianco explained that 17 countries using one currency does not work because all of the countries have their own vested interests. Bianco explained to Mack the issues with individual countries, and so forth. Bianco concluded that European recessions would continue to weigh on world growth for some time.

Regarding the situation in the U. S., Bianco expressed concern the recovery has become too dependent on government intervention. Bianco said taking into account the current rate of inflation, the real economic growth rate is negligible.

Mack asked Bianco about the fiscal cliff which has been said will occur in 2013. Bianco said the debt ceiling will be hit around labor day. At that point the Treasury can borrow against trust funds and use other methods to push off the ceiling until the election according to Bianco. He explained raising the debt ceiling is not a simple matter.

Bianco claimed the U. S. is in danger of another downgrade and explained that one more of the three rating agencies enacting a downgrade would be far more serious than just S&P’s downgrade last year.

Mack asked about the notion that corporate balance sheets have never been better with record levels of cash to which Bianco responded corporate earnings reports are not as impressive as they sound. He pointed out year-over-year earnings growth has been 5%, half of which has been attributable to Apple (AAPL).

The interview continued with Bianco discussing the possibility of future earnings disappointing investors, his fears of a stagnant stock market and stable bond market, the high correlations of individual stock performance to the market leading to a lousy stock pickers market, and the appeal of gold as an investment and emerging markets outside of China.

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