Standard and Poor’s late Friday evening evaluation of the creditworthiness of the United States is utterly irrelevant, except that it seems to have spooked that herd of wildebeests known as the stock and bond markets.   Done at the market close on a Friday, it allowed plenty of time for the herd to imagine all the terrible things that would accrue if the US defaulted on its debt.

The US will never default on its debt, not so long as it prints the money with which its debt is repaid.  What part of this simple reality is difficult for S & P and everyone else to understand?  The debt may be repaid in paper that’s about as valuable as toilet tissue, but the debt will be repaid.  Period.  It’s not clear that S & P had in mind a default by devaluation when lowering the USs’ credit rating, but if it didn’t, then its downgrade was completely and utterly superfluous.

Ironically, the downgrade caused the price of US bonds to increase, lowering to unheard-of levels the returns paid to those that lend money to the US.  Perhaps S & P and the US Treasury is in cahoots, not unlike S & P and the investment bankers were in cahoots in the previous decade.   The illogic of the markets responding to a downgrade in American debt by buying more of it means there’s more to the story than meets the eye.   Markets are not illogical; illogic only occasionally appear in markets as an emergent quality.  The path to apparently illogical market behavior is necessarily perfectly logical, i.e., is strewn with logical cause and effect analyses along the way, even if the ultimate destination seems illogical from its supposed starting and ending points. 

It’s not clear to me why an increase in the stock market indices is always considered good and a decrease bad.  Shouldn’t increases and decreases be neither good nor bad, but just reflective of the underlying supply and demand metrics for the slices of a company’s income stream their ownership represents?  How did we ever arrive at the foundational premise that more is always better, be it stock prices or McMansion square footage?

What is clear is that something of a stock market route is underway.   Expect the Fed to get involved.  In fact, if I were a savvy trader, I would buy the SPX tomorrow morning early because the Fed will be announcing it is on the way to a rescue by the afternoon.  Perhaps the markets aren’t like a wildebeast herd.  Perhaps they’re more like the ancient Hebrews wandering the desert on the way to the Promised Land, looking for a sign from the mighty Yahweh (Bernanke) that he cares about them and will protect them from evil.   Once Bernanke issues a sign that he cares for his people, the markets will settle down again, neverminding that caring and doing are two different things, and there’s precious little Bernanke can do because he’s already used all the tricks up his sleeve.

 After the Fed steps in to pledge alms to soothe the frightened nomads, the markets will calm down.  At least for a few days, or maybe even weeks.  Sell the bounce, because the plunge will have only been temporarily delayed.  The disquiet will return again, after which the Fed will reassert its concern, after which the markets will bounce, etc.  Wash, rinse and repeat.  One could make a killing on exploiting the volatility alone.  Hmm.  Maybe the investment banks were in on this after all.   

 

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