Market Humiliates S&P — Rejects Downgrade

[ProSense]

Market Humiliates S&P — Rejects Downgrade

Mets102

In the first day of trading since S&P downgraded U.S. sovereign debt the stock market is off significantly. Right now, the Dow, the S&P 500 and the Nasdaq are all off significantly. Global stock markets are also suffering through a similar selloff in the first trading since the downgrade. So, with stock markets selling off in response to the news, what about the actual asset that S&P downgraded, U.S. T-Bills? How are those doing in today's trading? They're going up.

Yes, you read that right, the asset S&P downgraded is increasing in value as a result of the downgrade. Why? Because whenever there is economic volatility and investors seek a safe haven they go to the one thing that's considered as risk-less an investment as possible: U.S. government bonds. So, while stock markets fall on the news of the downgrade, the actual downgraded asset is trading up today. That's kind of embarrassing for S&P, isn't it?

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Krugman:

Carnage in stock markets as I write — and all of the headlines I see attribute it to S&P’s downgrade.

They really are trying to make my head explode, aren’t they?

Once again: S&P declared that US debt is no longer a safe investment; yet investors are piling into US debt, not out of it, driving the 10-year interest rate below 2.4%. This amounts to a massive market rejection of S&P’s concerns.

The “signature” of debt concerns should be stock and bond prices both falling; what we actually see is those prices moving in opposite directions. And that’s normally the signature of concerns about a weak economy and deflation risk (see Japan, decline of).

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[Inuca]

1. I don't know about Krugman

but my own head may be on the verge of exploding. I don't know (nor want to know, I hate it) all this financial mumbo-jumbo, but I what's happening is crazy and kind of scary. And on a personal and selfish note, I guess that once again I will not dare look at my retirement funds for a year, same as I did after 2008 plunge and craziness. Not good whan you turn 60 this year :-(.

[animato]

3. I think this is a temporary blip

Corporations are quite strong now.

[golfguru]

7. Only the big internationals are a strong group

Mid-size corporations operate mostly domestic and are
taking a hit.

[animato]

15. Makes sense. Small Cap must be taking a bath as well nt

[iconocrastic]

5. You can go to cash and spare yourself the worry.

One good way psychologically is to sell half. Then in a few days do a gut check.

You can put some into GLD the gold trust to protect yourself from inflation.

And you can encourage your government to balance its budget.

[Inuca]

10. Actually no, I cannot go to cash

with the retirement plan that most of my $ are in.

[animato]

16. No financial adviser would say that now. Best is to think long term

Gold is inflated and you could end up buying at the top, though it is supposed to go up it's done most of its run

Going to cash will feel bad when things recover possibly next week!

[Scurrilous]

2. K & R

:thumbsup:

[DevonRex]

4. Anyone who paid attn to Bonds in July isn't surprised about S&P.

Anyone who's smart right now has their money in 10 year and over govt bonds and gold. which is great for the country. Heh heh.

[ingac70]

9. ....

http://www.thenewamerican.com/economy/markets-mainmenu-45/8495-soros-dumps-gold-inciting-fear-of-plummeting-price

[DevonRex]

14. ...

Gold Comex up about 67 today. I expect a slight pullback if reports calm the market in the coming days. But I expect year's end to be around $2000. It's mostly because of uncertainty in the currencies market.

[Supersedeas]

21. it does make you wonder

[unblock]

6. this analysis is just plain wrong.

much as i wish the market would have ignored s&p, they clearly are not.

what is going on is that the downgrade of u.s. treasuries signals a whole slew of OTHER downgrade, including fannie and freddie (today) and many states and munis to come.

this means that many OTHER investments have been effectively downgraded and THOSE investments really ARE worrisome in terms of ability to repay, unlike u.s. federal debt.

so even though the nominal target of the downgrade was u.s. treasuries, the real effect was to make investors sell other debt.
so where do they then put it?

well, into the most liquid market in the world, the market for u.s. treasuries. even if america's debt isn't the safest in the world, the liquidity of the market more than makes up for it. is everyone really going to flood the market for nowegian debt just because it's aaa? and the u.k. being aaa while the u.s. is not is just a joke, and everyone knows it.


in short, treasury rates have dropped because the downgrade makes it seem safer RELATIVE TO many other investments.
this is not a slap in the face to s&p, but a pervese comment on the strange order in which they chose to issue their downgrades -- in truth they should have downgraded the states and munis first, or at least simultaneously. then the market's reaction might have seemed less mysterious.

[golfguru]

8. Good post! n/t

[ProSense]

11. Well,

"this is not a slap in the face to s&p, but a pervese comment on the strange order in which they chose to issue their downgrades -- in truth they should have downgraded the states and munis first, or at least simultaneously. then the market's reaction might have seemed less mysterious."

...that's if you believe the S&P was justified to do what it did. Not only did the agency make a grave mathematical error, it also acted after the debt ceiling was raised and after the deficit was addressed.

Bloomberg: S&P Seen Surrendering to Tea Party:

Standard & Poor’s, the rating company that downgraded the debt of the United States to AA+ from AAA for the first time, now finds itself assailed by investors led by billionaire Warren Buffett for making a political decision that has more to do with Tea Party politics than the financial stability of the U.S.

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The other ratings agencies haven't followed S&P over to the dark side.

[unblock]

13. thanks, i should have added that clarification --

*if* they were going to downgrade u.s. treasuries, then they should have downgraded states and munis first.

personally, i believe that the downgrade was horsecrap. the debt ceiling negotiations were a comeplete debacle, and the dynamics have served to kill growth prospects, practically guaranteeing a further contraction of the economy.

nevertheless, repayment of u.s. treasuries isn't really in question, hyperbolic rhetoric of the republicans notwithstanding.

[animato]

17. That's why their downgrade can be easily seen as a political move by a Republican entity nt

[ProSense]

19. Fear inducing

S&P's action was political in design: cause a little fear and sell more cuts!

The fact that the stock market is impacted isn't really a sign of anything catastrophic. The stock market goes up and down, and some times it plummets. That's not good for stocks, but it has nothing to do with the underlying stability of the U.S. economy.

Krugman, again: It’s a Growth Scare

[BeyondGeography]

12. They like us, they really like us

[Raine1967]

18. Excellent post.

Thanks, Pro!

[Igel]

20. The downgrade was for long-term debt.

T-bills are, by definition, a year or less. Only in America is "a year or less" even conceivably imagined to be "long-term."

T-notes are for up to 10 years. I personally don't consider a bond that matures in 10 years to be particularly long-term.

Esp. since what's happening is plausibly not so much "US debt is great" but "US debt isn't as sucky as the alternatives."

"We suck less." That's what I like, an upbeat, positive spin. "Rah-Rah, America! We're #10 for suckiness!" Truly awe-inspiring.