Reality is chaotic and largely unpredictable. Most people (e.g., economists) like to model everything into clean theoretical algorithms. As the global economy has become a Mixed Bag, over-simplifiers seem to be having a major system malfunction.

Make no mistake: the global macro picture is ugly. The sovereign debt crisis continues to unfold as this week Moody’s (NYSE: MDO) downgraded Portugal. Growth in China (NYSE: FXI) has slowed. The UK and EU are moving forward with plans for austerity. Housing markets have cooled again. And, most frighteningly, deficits and debt-to-GDP levels are astronomical.

However, there are many emerging signs of a classic bottoming of the business cycle. Credit markets are functioning again. Corporations are sitting on piles of cash after cutting costs to the bone. Business spending on tech has starting to rebound. CEO hiring confidence has drastically improved year-over-year. M&A has picked up nicely. The system is flush with liquidity and backstop protection. New startups are making headlines everyday. And cyclical bellwether Intel (Nasdaq: INTC) just reported their best quarter ever (i.e., 42 years).

Unfortunately, this is a scenario which causes smoke to emerge from the ears of most people. In theory, we can look at macro economic data and make clean conclusions. In reality, human beings are extremely unpredictable and trillions of variables escape our over-simplifying eye.

Thus, we end up with two camps: bulls and bears. The bulls ignore the ugly macro picture, focus on the legitimate green sprouts, and optimistically imagine a future in which entrepreneurial zeal and consumption resurrect from the ashes. On the other hand, the bears ignore the positive developments, marginalize growing catalysts for growth, and pessimistically envision a future in which the entire system of blind faith in finance spontaneously combusts in a fiery apocalyptic finale.

As with just about everything, the truth probably lies somewhere in the middle when there is a Mixed Bag of data points.

As a media outlet, we know the shock of great depression and the awe of materialist utopia increases views and clicks. That’s why the mainstream media can’t wrestle itself from the addiction of the polarized circus.

However, if you want to make money — real money — the secret is to ignore the economists and showmen. Instead, spend your time doing the hard diligence which leads to successful investments. That way, if the market crashes or irrationally blasts off, you will win. Or, if the market chops for years, you will still win. All the unilateralists will win only when their broken clock briefly aligns with the sun.

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Yesterday, S&P (MHP) reiterated the UK’s AAA credit rating while adding a rhetorical threat to downgrade in the future. Really? The UK is AAA? That rating alone shows just how little the ratings agencies — including Moody’s (MCO) and Fitch — have changed since they abetted the CDO scams.

Ratings Agencies Agree with the Private Market: They have failed

In February, I posted a list of country credit ratings. The common theme: comments and emails noted that Greece, Portugal, Ireland, the UK, and US were recipients of grade inflation. So, if the ratings agencies are either doing a shitty job or purposefully protecting certain countries, aren’t they worthless? An S&P spokesperson seems to have said so:

“… Are the ratings agencies always the last to know, or just the last to acknowledge a problem? The agencies point out that they rely on facts presented by issuers, and that they are not responsible for conducting due diligence. An S&P spokesperson tells us, “We are not auditors; we are not accounting firms.” So if all the information about the assets underlying these bonds comes from the person selling them, and the credit rating agency never verifies any of it, investors might ask, what exactly does the rating agency provide? An opinion …”

Recently, Paul Taylor, president of Fitch Ratings, admitted the same failures: “The criticism is certainly justified,” he says. “In certain areas our analysis did not live up to the expectations we had.”

And the private marketplace agrees. “Alan Brown, the chief investment officer at the major fund management company Schroders, says, ‘They have not fulfilled the function they have set themselves. They have not protected investors from defaults. And they have been far too late in keeping up with rapidly changing times.’”

The SEC Needs to Rate Securities

The issue here is the Securities and Exchange Commission has outsourced their oversight responsibilities, and the move has been a complete failure. Thus, the ratings agencies must be shuttered and the SEC needs to start rating securities.

First, the SEC would benefit from getting into the weeds and understanding financial instruments from the ground up. Clearly, this level of enlightenment would have saved the world from chop-shop CDOs and uncollateralized credit default swaps.

Second, the cost to securities originators would be cheaper. The SEC model would be nonprofit, so fees would not include hefty profits which ratings agencies currently rake in. By eliminating the profit motive, the incentive to favorably inflate ratings would nearly disappear.

Investors Deserve the Truth

Underlying all the ratings manipulation is not only hefty kick backs (in the form of fees and other business relations) but also the assumption that investors are not entitled to accurate ratings. In other words, the truth.

The government admitted to lying during the Great Crash of 2008. (See “The Treasury Department Endorses Lying to the Public“) And now the ratings agencies are rubber stamping G8 countries with AAA ratings despite some of the greatest deficits and debts in history.

It’s time investors demanded the truth so we can make informed and educated decisions with our life savings. And since the ratings agencies admit they suck, let’s throw them in the trash where they belong.

What do you think about the ratings agencies? Let us know in the comments below …

Extra, Extra! Read all about it: SEC Enforcement Director Robert Khuzami told the Senate Judiciary Committee the SEC is “looking very closely at credit rating agencies” — Moody’s Investors Service (MCO), Standard & Poor’s (MHP) and Fitch Ratings — and is “focused on that area” for their role in the global derivatives scam.

Seriously? Do we live under the rule of law in a capitalist economy? If so, companies need incentives to avoid running scams before they run them. Otherwise, the cost-benefit analysis will continue to look like this:

1) Make mega-billions running a “legal” scam which will later come under scrutiny.

2) Pay millions in fines.

3) Replace executives who walk away after collecting huge salaries, bonuses, and dismissal packages.

4) Time passes, all is forgotten.

5) Repeat Step #1.

I wonder how many more years the SEC will “look at” the ratings agencies before they nail them for putting USDA Grade A stickers on rotting horse shit. Maybe the SEC should do some soul-searching and ask why they allow private for-profit companies (with tons of conflicts of interests) to act as an oversight committee for financial products. Is that not the role of a governor? It’s as laughable as renaming “bribery” the socially acceptable term “lobbying.”

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