Moody's credit downgrade is a macro game changer. What now?

Arabian Post

18-05-2025

Matein Khalid
While I was not surprised by Moody's decision to cut the sovereign credit rating of the US from Aaa to Aa1 since I have done my best to warn my friends in this post about the King Dollar's vulnerable underbelly on debt/deficits, I am surprised that the credit rating agencies is willing to risk the wrath of Trump White House with this move. After all, Trump could well invoke the International Emergency Economic Powers Act to handcuff Moody's entire executive board for an enforced sojourn in Club Fed or even declare or shut down the credit rating agencies for this un-American act of lèse-majesté.
However, nothing good will come out of this move for risk assets or the US dollar. US Treasury bond yield will rise, the S&P 500 will tank on Monday and the Republicans now a neo-Maoist personality cult for Tariff Man rather than a pragmatic, rational political party will go ballistic in their political outrage.
The timing of this move is Godawful. The S&P 500 Index is up a stellar 20% since Trump did a U-turn on China tariff and the need to sack 'Mr. Loco/loser' Jay Powell from the Federal Reserve. It will also amplify the existing decline in both consumer and business confidence as well as increase credit/liquidity risk premia in the stressed FHA mortgage debt, auto loan, credit receivables, student debt, junk bond and asset backed securities market in an economy that must refinance $9.5 trillion by this winter. The Moody's move will also reinforce the embryonic megatrend towards a strategic asset allocation shift by global investors out of greenback assets, the dominant theme in post-Liberation Day financial markets for moi.
See also My bearish King Dollar and black gold trades are money gushers!
I did not need Moody's to enlighten me that something was dangerously wrong in a $28 trillion economy with $35 trillion in debt and almost $2 trillion in annual budget deficits that Uncle Sam, the world's monetary emperor, literally wore no clothes. The global sovereign debt market is full of miss priced credit and the US is only the tip of a very dodgy intercontinental iceberg where serious money can be made by the leveraged cognoscenti at the expense of the trusting, patriotic, my country right or wrong loony-tune lambs.
Nicolo Machiavelli wrote – 'do not put your trust in the false promises of princes' after a lifetime navigating the murderous politics of Renaissance Florence. As a citizen of a Third World state under military diktat that just received a $1 billion IMF thank you gift from Trump last week for being part of a brilliant people, especially since I got 4-degrees from the same Penn/Wharton, I can only say thank you POTUS, we love ya!
Moody's will increase the pressure on money managers to take profits in US equities and corporate bonds. Since Moody's has cast the first stone into the US Treasury bond market, the benchmark for risk in debt, the shockwaves of the credit downgrade will spare not even the most obscure outpost of the global financial village. The only consolation is that unlike the case in August 2001, even Dr. Louis Pangloss would have priced in a skeptical risk premium on the tsunami of Treasury supply in the pipeline, given fiscal voodoonomics in Washington and the ominous drum beat of the trade war.
Even though none of this is new to the Wall Street cognoscenti, higher interest rates on Uncle Sam IOUs, possibly a 5% yield on the 10 year US Treasury note, means a bloodbath for global debt markets and a spike in volatility that will shred private bankerji crafted, fiendishly complex structured note, which will be explosive landmines in investor portfolios. Fly, Robin, Fly. Up, up to the sky.
See also What next for global risk assets and dollar rates?
I expect the mother of all swap trades out of T-bonds into non-dollar, non-paper and safe haven assets as the cost of debt service for the planet's borrowers just went up dramatically. This also means illiquid assets like private credit and real estate could prove leprosy in the months ahead, especially in dollar pegged currencies where devaluation cannot act as a macro shock absorber.
It was a little uncharitable for Moody's to stiff Trump with this credit bombshell after he just won $2 trillion in commitments to invest in the US from three Gulf petro states. It would be a national disaster if Qatar yanked the yummy $400 million gold plated Boeing 747 that Trump desperately needs as his post-retirement aerial Presidential Library to jet across the world.
Young man, there's no need to feel down. I said, young man, pick yourself off the ground
Matti trade du jour? Short greenback, bear steepners in Bondland, short crazy val US equities, short Tesla (TSLA) since you are nothing but a hound dog since DOGE only cut the flab by $150 billion and not the $2 trillion Elon promised Planet MAGA. Short Mag-7, short real estate, short private credit, long gold, long crypto, long sterling, long EM.
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