Sunday, August 7, 2011

My Downgrade .02

Let's start with the premise that the ratings agencies know what they are doing. Yes, I took my happy pills this morning.

A downgrade may not mean anything to the bond market itself. Here is something I posted in a discussion with a friend:
Speaking as someone involved in the financial markets, the rating itself is tempered by perception and demand. Therefore, a AAminus Treasury bond may very well trade exactly the same as it did as a AAA. that means the borrowing costs of the Treasury do not change. Neither will car loans, etc... I will let you decide if that means the govt will see that as a reason not to change its ways.
Now, back to the ratings agencies.
  1. They messed up the housing crisis and are overly concerned with being too late here
  2. They messed up before and have seriously changed their ways to become reliable
  3. They messed up before and we now know they are irrelevant.
Think about this, one committee at S&P took a business action and brought down the world's markets and tone. What makes their view better than Moody's or Fitch's? I can see how one rogue trader took down Barings Bank but he played with Barings money. S&P does not play with USA money yet somehow we panic when they put out a report. This is listening to a Wall Street analyst on steroids and we know how well Wall Street analysts do. I hark back to the first bear market in 2000 as analysts upgraded their opinions as individual stocks went lower.... and lower.... and lower.

Perception is reality so this downgrade means something. But it says more about how we as a society pass responsibility to others and wonder why things go bad.  Do your own homework.

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