Reformed Broker's True/False on Wall Street After Downgrade

After another 630-plus nosedive of a day for the Dow —  the major market indices’ most negative day since 2008’s financial crisis — it was refreshing to see a dose of levelheadedness over at The Reformed Broker.

Today, Joshua Brown served up a thoughtful eight-part true/false quiz on how he makes sense of the current post-Standard & Poor’s downgrade world. Three of the eight items follow…

According to The Reformed Broker:

S&P has no credibility anyway: TRUE

As Paul Krugman reminds us in his piece on chutzpah this morning, S&P was one of the prime contributors to the credit bubble that got the US into this position in the first place, it was also rating Lehman Brothers bonds as “A” up until the day Lehman filed for bankruptcy.

The Downgrade to AA+ will force institutions to dump Treasurys: FALSE

Virtually no one running institutional money will be selling treasurys as a result of S&P.  They are owned as a highly-liquid instrument and the downgrade does not affect that feature.

Borrowing costs will shoot up for the US government and its related entities: FALSE

S&P is just another opinion, albeit a widely-heralded one.  In the long run, the market forms its own opinion and acts accordingly.  My friend Vitaliy Katsenelson reminds us that “Japanese debt was downgraded to AA- in January 2011.  It was a nonevent.  Despite being the most indebted developed nation, Japan is still borrowing at the same pre-downgrade rates, which are half of the rates the US government pays on its debt.  On the other hand, Italy’s 10-year bond rates jumped to 6% in August without any downgrade by credit agencies: the markets did their own credit analysis.”

Krugman — and others like quadruple-A Warren Buffet himself — are pointing fingers at S&P for the mess. Both, of course, following in Treasury Secretary Timothy Geithner’s footsteps… blaming S&P for $2 trillion math mistakes, rounding errors, and “a stunning lack of knowledge about basic US fiscal budget math.”

Be the math as it may, there’s no way around the simple idea that — in addition to the huge budget deficit — there’s a massive leadership deficit in Washington, and the downgrade largely reflects “political disharmony” in the US, as Brown phrases it. You can read five more components of The Reformed Broker’s true/false quiz in its post on Wall Street AD (…After Downgrade).


Rocky Vega,
The Daily Reckoning