"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Monday, April 18, 2011

Moody's - or - Standard and Poor's?

I have been fielding a few private emails asking about the rather bizarre behavior in the bond market today. After being greeted with a downgrade to the US credit outlook from "stable" to "negative" by S&P, the bonds sold off sharply falling near a full point at their worst level.

They then began moving higher even as the stock market was sharply lower as the rival ratings agency, Moody's issued a positive outlook on its own AAA US rating. Moody's did site some of the same concerns as S&P but suggested that the US government would reach some sort of agreement on dealing with the massive debt problem in contrast to S&P which was not at all confident that leaders would be able to come to any agreement to deal with it.

Moody's also cited issues facing Greece and thus drew some attention off of the US credit issues and back onto Euro sovereign debt issues. 

The situation reminds me of the scene from the old movie, "Deliverance", with the dueling banjos. Moody's basically pooh-poohed S&P. My way of thinking is the US citizens are the ones going to be doing the squealing when the dust finally settles - those who saw the movie and remember that one scene will know exactly what I am referring to.

If that was not enough, the US National Association of Home Builders Index revealed that homebuilder optimism in the industry dropped one point in April from 17 to 16. That served to reinforce the notion of a sluggish economic pace of "recovery" in the US calming some concerns about any early end to QE2 as some of the Fed governors were out yacking about once again.

I should note here that the speed at which the long bond market fell tells us just how precarious things are in that market. In my opinion, it is a giant accident just waiting to occur.


  1. Only when the Sheeple (sheep + people) wake up and realize that the US Bond is NOT the safe haven everyone claims it is, will we be able to see a sustained drop. Everything else can rally or go bust but the FED cannot loose it's grip over the bond market. The bonds are the FED's playground, if they loose this battle then the whole ponzi comes crashing down.

    I still wonder what the effect on the Bonds would be, if tomorrow the US came out with a balanced budget or if they announced the end of the wars.

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  3. The Republicans fight with the Democrats for POWER.
    The Democrats fight with the Republicans for POWER.
    Politicians ONLY work to maximize their power.
    The Banksters are addicted to POWER (money)
    The Sheeple are viewed by all the above as fools to be manipulated.
    There is NO way the interests of the Sheeple will be respected until they take power back into their own hands>>> and start the cycle over.
    We are all witnessing a train wreck in slow motion and we all know where this is going...it's just a matter of living out the scenes yet to come.

    The Fraud that was and is...will become Fear and then Anger as the Sheeple realize they have no Pensions, no Medical plans and no Savings and possibly little food.

    Jobs and Shelter are being threatened right now with most being thankful the 1 in 5 unemployed is not them...while they stick their head in the sand and hope the world will be ok (Normalcy Bias)
    When this comes unglued and the chaos is accelerating at an exponential rate ...you can feel it...I would be very surprised if there were not literally torches and pitchforks on Wall Street and in Washington.

    Hell the civil servants in Greece rioted over being forced to work till 60 from 55. Can u imagine what they will do when they find out their pensions are really worthless government bonds?

    Now translate that to the USA when the entire population has no pension or health care and all the civil servants realize they won't be getting paid in money that is worth anything.

  4. OMG! LMAO! Deliverence? Dueling banjo's? Squeal?
    Dan, you are awesome for your spot on work and the human element you bring to it.
    A smile to my face at the end of a bizarre day. Excellent!

  5. Dan don't even own a bond fund much less a bond but I was squealing with what my miners did today.... not happy squealing mind you....more of a Deliverance association. Appreciate the work you've done to clear the air on that manipulated situation. Indeed crazy gyrations thanks for the sort out. Where to next.....Hope all have a cushion for more craziness and are working hard to buy themselves a learning curve for all types of scenarios. Best

  6. maybe this has something to do with it:


  7. @RickR: Implied in so many financial projection equations is the risk-free rate of return, Rf, which is defined as the rate of return on 6-month treasury debt. Rf is assumed to have a zero risk premium. With S&P's downgrade yesterday and the reality of the U.S. Budget/political landscape is that really still a valid assumption. This is essentially what you are saying.

    Now, if you are correct (and I think that you are) think about the level of systemic errors that infect nearly every financial instrument in existence. It gets frightening really fast the farther that risk premium drifts away from zero.


  8. I would call anyone still using the 6 month T-bill as a the risk free rate myopically naive... or dishonest. Couldn't see how any number under 500 basis points could be remotely honest...and thats probly pretty thin.
    Derivatives its us for dinner...eventually


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