What Does Yellow Freight’s Bankruptcy Have to Do with You? by Scipio

Unless you are (were) an employee of Yellow Freight, this bankruptcy does not directly affect you.  However, if you are a supplier for Yellow Freight, or if Yellow was a purchaser of your products or services, you will indirectly be adversely affected. Yet, there will be those who will benefit, namely Yellow’s major competitors; FedEx, SAIA, Old Dominion and CSX among others as well as some former Yellow Freight employees who will benefit because these company’s need to hire new employees.  Yellow’s bankruptcy will have a cascading effect throughout the transportation industry, and the economy as a whole.

https://www.zerohedge.com/markets/yellows-collapse-tailwind-other-freight-carrier-names-deutsche-bank-says

https://www.freightwaves.com/news/yellows-demise-2-decades-in-the-making

So, what Scipio, I don’t fall into either of these categories, why do I care? Excellent question, I am glad you asked!

The PROCESS of Yellow’s demise is why you should care. There is a lesson here to be watched as it affects us all and we should all care. This is a preview of the upcoming default on the US Government’s debt, and equally important, its creditworthiness. Yellow’s decline took almost twenty years, but it was as recent as May 2023 when it was downgraded to “junk” but by July, Yellow Freight defaulted. The slow ending happened fast.  We are seeing a similar slow, many decades long, decent into US bankruptcy that we just witnessed with Yellow Freight.  The prestigious rating agency, Fitch, stated this twenty year plus decline in its Yellow Freight downgrade and resulting bankruptcy should not have taken anyone by surprise. The same is true for the nation’s current US debt.

Similarly, there has been lots of talk about US default for years. This week, a very ominous event took place, a shot across the bow so to speak. Fitch announced it was lowering US debt from AAA to AA. This directly effects US Government securities’ value, and indirectly every American. Since much of our financial system is based on so-called “risk free” Treasuries, that confidence just took a big hit.

https://www.fitchratings.com/research/sovereigns/fitch-downgrades-united-states-long-term-ratings-to-aa-from-aaa-outlook-stable-01-08-2023

(also, for further explanation of the implications)

https://www.nerdwallet.com/article/finance/debt-ceiling

This downgrade has been brewing for some time.

“In the middle of the debt-ceiling ‘crisis’ in May, with Fitch, Moodys and DBRS all threatening to do what S&P boldly did in 2011 and downgrade the US should the debt ceiling crisis lead to a technical default, China’s leading rating agency, China Chengxin International Credit Rating decided not to wait, downgrading the USA’s rating by one notch, to AA+ from AAA, citing high inflation and the widely watched debt-ceiling stand-off.

Today, Fitch decided to get off the pot and join S&P and Chengxin, downgrading USA’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘AA+’ from ‘AAA’.

Fitch, one of the three largest rating agencies just downgraded US securities from AAA, the highest rating, to AA the second highest rating.  What is a “rating agency” you ask?  That’s another good question.  It is a company that uses a proprietary rating scale to summarize the risks associated with any debt; public or private. The rating is based primarily on the debt’s risk of default and credit worthiness.  It’s similar to a high school athlete being downgraded from a five star to a four star.  A four star is still highly rated, but the “reason” for the downgrade determines how highly that athlete will be recruited in big time programs.

So, what is the “reason” Fitch downgraded US debt from AAA to AA Scipio?  That’s another good question. You guys (gals) are smart! The last time I remember this being done on US Debt was in 2011 in response to the effects of the 2008 financial crisis and the US Budget impasse. At that time, it was defaults in the private sector that almost brought down the entire financial system. The rating agencies (Fitch included) then incorrectly rated speculative real estate CBOs (Collateral Backed Obligations) AAA when they should have been BBB, which is borderline “speculative” or more accurately, CCC “speculative” aka “junk”.

The subsequent blow-up cost Citibank $34 billion, Merrill Lynch $26 billion, and AIG $38 billion dollars in losses. But they suffered no loss because the US Government, Republican and Democrat supported, bailed them out with tax payer’s money putting The Weight (by The Band) right on me.  No one went to jail then and, adding insult to injury, many of the bank presidents were either promoted or retired with multi-million-dollar severance packages, which the late Rush Limbaugh thought was fair BTW.

https://www.journals.uchicago.edu/doi/full/10.1086/648293

The immediate effects will be on interest rates when the US Government borrows money in the future.  Future interest rates will be higher because the increased “risk” of the downgrade. In other words, the already ballooning interest only payment due on the national debt is about to go hyperbolic.

Needing more debt to fuel their Fentanyl style spending addiction, the US Government’s borrowing will crowd out private competitors for US Treasuries thus making it harder for private businesses and individuals to get loans.

Most pension plans, insurance companies, as well as many mutual funds and ETFs invests in bonds.  The US Government’s bond pool is the largest bond offerings available in the world and is the foundation of many pensions; 100% for Social Security for example. These funds are often legally required to immediately sell bonds that have been downgraded.  The state of North Carolina has a provision it its state retirement plan to this effect for example.  The result is these pensions lose money. That’s because the high value bonds they first bought are no longer as attractive as before, and these bond’s forced sell lose money when sold in a fire sale at the secondary market.

The biggest investors in US Bonds are foreign sovereign investors.  We have already seen a cooling in US Government purchases by international financial heavy weights like the Saudis and Chinese.  That will escalate and feed into the coming decrease in the value of the US dollar, which will be collateral damage from the Fitch downgrade in the long run.

Don’t worry about a US Government default immediately. That’s not today’s worry, that’s for tomorrow. Implications of the reduction in US creditworthiness is an immediate and consequential result of the downgrade if you happen to need to borrow money in the future, or have a retirement plan, or have a mutual fund or ETF, or have an interest in an already troubled Social Security system.

So, there’s your answer to why you should care about Yellow Freight’s bankruptcy declaration. Thanks for sticking with me in my long answer to a seemingly simple question. Truth is, my explanation is a short answer to the real complexities and implications of Fitch’s downgrade and Yellow’s default.

Remember, the only difference between the Mafia and the US Government is that the crime in the Mafia is organized.