Market Reaction
[Updated for the market close]
Showing why they are ‘Masters of the Universe’, investors have reacted to the S&P downgrade last Friday by selling stocks and buying US Treasury bonds. As a result of S&P’s analysis of the US credit-worthiness, investors have decided to ‘punish’ the US by forcing the Treasury to pay lower interest rates on its bonds.
This isn’t from The Onion. The US cost of borrowing has gone down since the S&P downgrade.
NEW YORK (CNNMoney) — U.S. stocks plunged deep into the red on Monday as fearful investors faced the news that the United States had lost its coveted “AAA” credit rating.
All three major U.S. stock indexes were down between 4% and 5%, pushing the Dow below 11,000 for the first time since November.
The stock market has now lost 14% during the past two weeks.
…The VIX (VIX) — Wall Street’s so-called “fear’ index — jumped 39% to 44.38, the highest level in more than a year.
…With so much uncertainty, investors were leaving little to chance. Despite the downgrade of U.S. debt, Treasury prices rose, pushing yields lower, as investors fled into the relative safety of government-backed debt.
The yield on the benchmark 10-year U.S. Treasury fell to 2.44% from 2.56% late Friday.
“The Treasury market seems to be oblivious to the fact the U.S.’ credit rating was downgraded,” said Quincy Krosby, market strategist with Prudential Financial.
OK, this isn’t irrational. The smart investors see deflation coming, and they want to be liquid. They are moving to cash and the safest bonds around, US T-bills. The default risk is really in the Euro-zone because the individual countries don’t control their currency. Ireland, Greece, Portugal, Italy, and Spain are in the position of the state governments in the US, i.e. they can go broke and default. The European Central Bank has finally figured out that it needs to act, because the markets won’t, but it isn’t clear that it will do enough.
Basically the ‘free market fairy’ is waiting for a government hand-out, because the real ‘welfare queens’ are the CEOs of financial institutions and corporations.
I would note that Badtux and I have been talking about deflation for a very long time, while the Very Serious People in Washington have fixated on inflation and the ‘bond vigilantes’. The investors have realized that the austerity movement has just about guaranteed deflation.
6 comments
As I pointed out yesterday, investors are assuming that teabaggers are going to be out of office within 16 months, and thus buying 10-year Treasuries is not a risk. Now, if teabaggers retain control of the House next year, then investors may re-assess. But that’s a big “if”.
At this point either the re-election of Zero or the teabaggers would yield the same result – long-term deflation. Neither seem to understand what the problem is, or how to solve it.
I assume that you are in liquid assets. I know that what I have certainly is. In addition to the major unemployment problem, we have people with money expected deflation, so demand is even further reduced. WASF
The difference between Zero and the Teabaggers, Bryan, is that Zero wasn’t threatening to default. The threat of default is the only thing that could cause investors to flee Treasuries. So from investors’ points of view the Teabaggers are an issue, Zero isn’t.
Of course, from *our* point of view Zero is weak tea, his only redeeming virtue is that he’s a tool but he’s not batshit crazy like the ‘Baggers or Michelle Bachman, but we’re not the people with billions of dollars in Treasuries.
Yes, I’m fairly liquid right now. I got out of the stock market the last time my portfolio lost a sizable percentage of its value, which was when I realized that the game was rigged and I was never going to get that money back. Which is why I laugh at the people who claim money will flee Treasuries for… what? Other rigged games? ROFL!
– Badtux the Finance Penguin
I’m focused on the effects of deflation on everything. Loans don’t deflate, so if you owe money, you are screwed by deflation. It happened to a great-uncle who had a thriving dairy farm. People continued to need milk, but the price dropped until it wouldn’t cover his mortgage, and he lost it.
He made it through with a job with the WPA building the high school I graduated from as my Mother had before me.
Zero isn’t trying to burn down Washington, like the Tea Party, but that’s only because his bosses still have more to loot before they leave.
Luckily(?) I don’t owe money. I deleveraged before deleveraging was good, selling my house before the housing crash, paying off my car, and paying off my credit cards. My story, BTW, is why the housing market isn’t going to come back anytime soon. Every time I look at buying a house, it becomes clear and apparent that the housing market is *still* too screwed up to even think about it. If I can rent cheaper than I can own, buying a house makes no sense at all given that housing prices continue to decline.
– Badtux the Housed Penguin
It isn’t just the price, it is the reality that the way the banks have screwed up the real estate records, you can’t get title insurance that is worth whatever you pay, and you have no idea who property belongs to.
The friend that I do rehabs for would like to buy again, but he can’t find anything for sale that has a clear title to the land. He has looked at a couple of places, and the county records are missing one or more transfers that he is aware of from talking to the neighbors. They were newer houses than his usual choices and in decent neighborhoods, but he can’t be sure what his money would be buying.
He doesn’t ‘flip’ houses, he rents them, and he has had to reduce the rent on a number of properties to keep them occupied.
I don’t owe anything I can’t pay off with a check tomorrow, but, by taking out the loan, rather than paying cash, I still make money off the cash. IOW, the interest on the loan is less than the interest on the cash, so it made sense to use the loan.