If S&P’s downgrade actually matters, why are bonds up?

I keep reading about how stocks have fallen because of Congress or S&P’s downgrade of Treasuries. Both theories are nonsense. Stocks markets were overvalued (and still are), overbought and overbullish, so this decline was inevitable.

How do we know that S&P’s ratings are meaningless? Well, they almost always downgrade debt after it’s fallen, and in this case the markets are completely ignoring the rating. Here’s the 10-year note not giving a damn:



Congress and its budgets do matter, but there is so little difference between the two parties that the debate is moot. Even the “hard-line” Republicans want to just maybe someday slow down the rate of spending growth. Sorry guys, a negative 2nd derivative doesn’t count as a budget cut.

Eventually yields will turn up, but as I have pointed out for years now, interest rate cycles are very long and don’t have to make fundamental sense, especially not at tops and bottoms. Even if this happens to be the very bottom, nobody is going to get rich quick by shortng Treasuries. Here’s a 180 year chart to put things in perspective:


David Einhorn: Scrap the official ratings agencies (Moodies, S&P, Fitch)

From Bloomberg:


Einhorn has shorted S&P and Moodies. Some take-aways:

Rating agencies are a “public bad,” not a public good.

We need a systemic change to reject the idea of centralized official ratings.

The market would adjust if we didn’t have them.

On Buffett: “He still made a very nice investment for himself.”

“The brands are ruined.”

The companies may lose their equity in (much-deserved) lawsuits.

Margins during boom reflected compromised objectivity, competing for market share.

Without official ratings the market would adjust to risks itself. Official ratings create an arbitrage opportunity: real credit risk is often higher than ratings imply (look at BP: downgraded by just “1/2 notch or something like that.” Ratings allow sharpies to front-run downgrades or prepare to take advantage of depressed prices following downgrades.

Agencies add little value. Market spreads are a much better indicator of risk.