The Serious Stock Market Crash Thread

Today was about the downgrade. Last week was about the European banking system. Last week, most European stock markers fell further than the US.

Here is what I do not get, and apparently I am not the only one that is completely confused by this. If this is about the downgrade why are so many people buying treasuries?

Paul Krugman.

Aaauuuggghhh! Market Commentary Edition - NYTimes.com

Arnold Kling.

Market plunge: Don't blame the Standard & Poor's downgrade

The Downgrade might be a factor, but it is certainly not the driving force behind what is happening. If it was people would also be avoiding the one thing that is directly related to the downgrade, and they are not doing that.

I disagree with Krugman. There is a weird dynamic in the market right now. Treasuries are the default instrument for those seeking safety. So a downgrade increases fear in the market, which causes buying of the "safest" investment, which are Treasuries. It's circular, I know, but don't the market is weird sometimes. Note that Japan was downgraded many years ago to AA+ and yields on JGBs are far lower now than when they were when they were downgraded. The market is selling off in part because of the economic slowdown, but that wasn't why we were down so heavily today.

At 8pm, Dow futures were down another 75 points.

It is not just Krugman though, most of the economists are pointing out the discrepancy. You want to dismiss it as people going for what is safe, but if this is actual fear of the downgrade then treasuries would not be the refuge of choice, and people would be demanding higher interest rates to compensate for the added risk.

That is not happening.
 
Today was about the downgrade. Last week was about the European banking system. Last week, most European stock markers fell further than the US.

Here is what I do not get, and apparently I am not the only one that is completely confused by this. If this is about the downgrade why are so many people buying treasuries?

Paul Krugman.

Aaauuuggghhh! Market Commentary Edition - NYTimes.com

Arnold Kling.

Market plunge: Don't blame the Standard & Poor's downgrade

The Downgrade might be a factor, but it is certainly not the driving force behind what is happening. If it was people would also be avoiding the one thing that is directly related to the downgrade, and they are not doing that.
They are buying treasuries because the US is always looked on as a safe have in times of crisis. While stock markets were selling off around the world bonds rallied. The 30-year bond price gained more than a point in price as investors sent their own clear message that in times of turmoil, Treasurys were still the safest house on the block. News Headlines

Keep in mind that the two other major bond rating services, Moody's and Fitch have not change their AAA rating. In fact Moody's reaffirmed that rating twice this week.

I find it interesting that S&P, whose failure to rate bonds properly were a major cause of the 2008 debacle in the bond market is now setting off a major stock market crash in 2011.

S&P has been wrong pretty consistently recently. Maybe investors are betting on their track record.
 
I disagree with Krugman. There is a weird dynamic in the market right now. Treasuries are the default instrument for those seeking safety. So a downgrade increases fear in the market, which causes buying of the "safest" investment, which are Treasuries. It's circular, I know, but don't the market is weird sometimes. Note that Japan was downgraded many years ago to AA+ and yields on JGBs are far lower now than when they were when they were downgraded. The market is selling off in part because of the economic slowdown, but that wasn't why we were down so heavily today.

At 8pm, Dow futures were down another 75 points.

Is it possible that the markets have more trust in the ability of the US to pay than they do in the ability of corporations to pay in this economy? Even with the downgrade, no one thinks the US will suddenly stop paying its debts. No so much with corporations.

Most likely.

Remember, a downgrade doesn't mean that the US will default. It means that the probability of a default has risen. And a decline from AAA to AA+ is a fairly minor increase in the perceived probability of a default. That isn't a minimization of the downgrade, just a recognition of what a downgrade means.

Dow futures down 90 at 8:20.
Also keep in mind that Moody's, the largest bond rating service in world is not in agree with S&P, nor is Fitch.
 
Is it possible that the markets have more trust in the ability of the US to pay than they do in the ability of corporations to pay in this economy? Even with the downgrade, no one thinks the US will suddenly stop paying its debts. No so much with corporations.

Most likely.

Remember, a downgrade doesn't mean that the US will default. It means that the probability of a default has risen. And a decline from AAA to AA+ is a fairly minor increase in the perceived probability of a default. That isn't a minimization of the downgrade, just a recognition of what a downgrade means.

Dow futures down 90 at 8:20.
Also keep in mind that Moody's, the largest bond rating service in world is not in agree with S&P, nor is Fitch.

So why did S&P downgrade? They certainly do not have a good track record and have admitted to making that 2 trillion dollar mistake.

How is it possible that a rating company with a bad track record can cause a world wide panic?
 
Here is what I do not get, and apparently I am not the only one that is completely confused by this. If this is about the downgrade why are so many people buying treasuries?

Paul Krugman.

Aaauuuggghhh! Market Commentary Edition - NYTimes.com

Arnold Kling.

Market plunge: Don't blame the Standard & Poor's downgrade

The Downgrade might be a factor, but it is certainly not the driving force behind what is happening. If it was people would also be avoiding the one thing that is directly related to the downgrade, and they are not doing that.

I disagree with Krugman. There is a weird dynamic in the market right now. Treasuries are the default instrument for those seeking safety. So a downgrade increases fear in the market, which causes buying of the "safest" investment, which are Treasuries. It's circular, I know, but don't the market is weird sometimes. Note that Japan was downgraded many years ago to AA+ and yields on JGBs are far lower now than when they were when they were downgraded. The market is selling off in part because of the economic slowdown, but that wasn't why we were down so heavily today.

At 8pm, Dow futures were down another 75 points.

It is not just Krugman though, most of the economists are pointing out the discrepancy. You want to dismiss it as people going for what is safe, but if this is actual fear of the downgrade then treasuries would not be the refuge of choice, and people would be demanding higher interest rates to compensate for the added risk.

That is not happening.

I long ago stopped listening to (almost all) economists describing what is going on in capital markets. Most of them have little practical experience. I heard investors talking about a bid in Treasuries if the US defaulted, which is even more severe than a downgrade, and an even greater contradiction. Our bond desk was talking to the Street about the buying Treasuries during today's session. Some of the weakness in the economy which weighed on markets last week bled into the markets today. And there were other factors as well - if you think BofA might go belly up, would you rather own BofA bonds or Treasuries? But everything I heard was about the downgrade. The economists may eventually be right about this, but they are wrong today.
 
What if everyone wakes up tomorrow and realizes that since investors are flocking to US Treasuries, they are not a crap shoot? What happens to the panic then?
 
marketOpen.png
Australia -199.40 -4.92% 3,857.30 8:59pm ET
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Japan -369.17 -4.06% 8,728.39 8:59pm ET
 
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Burton Malkiel says it better than I can:
No one has ever become rich by being a long-term bear on the fortunes of the United States, and I doubt that anyone will do so in the future. This is still the most flexible and innovative economy in the world.

I will be getting back into stocks at some point in the near future. I have made double digit returns in long term treasuries and will re-balance soon. I am long term bullish on America. As Churchill said - "America will always do the right thing, but only after exhausting all other options". I think we are close to the point were we've exhausted all the other options. I see a wave of fiscal conservatism sweeping the nation.
 
Most likely.

Remember, a downgrade doesn't mean that the US will default. It means that the probability of a default has risen. And a decline from AAA to AA+ is a fairly minor increase in the perceived probability of a default. That isn't a minimization of the downgrade, just a recognition of what a downgrade means.

Dow futures down 90 at 8:20.
Also keep in mind that Moody's, the largest bond rating service in world is not in agree with S&P, nor is Fitch.

So why did S&P downgrade? They certainly do not have a good track record and have admitted to making that 2 trillion dollar mistake.

How is it possible that a rating company with a bad track record can cause a world wide panic?
IMHO, they were asleep at the switch in 2008 and wanted to be the first to alert their subscribers of a deterioration in US credit worthiness. However, Moody’s and Fitch didn’t follow S&P’s lead, so S&P was left out in cold to justify their downgrade. Instead of pointing to a rigorous financial analysis, they said their decision was based on a political analysis, which is not their forte.

The markets were worried about a double dip and the debt problem both here and abroad so the ratings downgrade was all that was needed to get the ball rolling downhill.
 
What if everyone wakes up tomorrow and realizes that since investors are flocking to US Treasuries, they are not a crap shoot? What happens to the panic then?
There is very little difference in terms of yield in a AAA and a AA+. Also the bond rating services often differ in their opinion for issues rated this closely. To put this in perspective here is the definitions of S&P bond ratings.

AAA and AA: High credit-quality investment grade
A and BBB: Medium credit-quality investment grade
BB, B, CCC, CC, C: Low credit-quality (non-investment grade), or "junk bonds"
D: Bonds in default for non-payment of principal and/or interest

Read more: Bond Rating Definition

A, AA, and AAA are considered investment grade which means financial institutions such as, insurance companies, some banks, and pensions funds are permitted to invest their reserves because the possibility of default is extremely remote.
 
From Pravda ... Just to give us a little perspective.

Note about the text. Israel regards Sunday as a regular work day, as the two biggest religions in the country count the sabbath as either Friday or Saturday, which is why Israel's market was open when the first.

The economic crisis in the United States and the downgrade of the American credit rating has already affected the Russian reserves. The markets of Asia and Israel reacted to the news first. The setback was registered on the stock markets of Australia too. In Moscow, the RTS index lost two percent during the first ten minutes of the tender. The European Union and the United States may remember August 8th as the Black Monday.

According to experts' estimates, the downgrade of the US credit rating may mark the beginning of the new financial era. Global financial markets may wake up in a new world on Monday. Mohamed El-Erian, chief executive of Pacific Investment Management Co., or PIMCO, referred to the current situation as the "Sputnik Moment." He compared the reassessment of US financial positions to the shock, which the Americans experienced when the USSR launched its first satellite in 1957, in the midst of the Cold War.

Many other countries already begin to count the losses. Russia has already lost over 108 billion rubles because of the reduction of the US credit rating. Russia's Reserve Fund and the Fund of National Welfare have the following structure: 45 percent in dollars, 45 percent in euros and 10 percent in British pounds. The loss of a part of reserves is only a start, experts say. The crisis may exacerbate the situation on the world market of oil, which will inevitably strike a serious blow on the Russian economy.


"The credit rating is an assessment of the risks to lose money. In this particular case, one may say that the rating was reduced post factum, so it reflects the losses that foreign investors have already suffered," Yevgeny Gavrilenkov, the chief economist of Troika Dialog private investment bank said.

"The losses are connected with the weakening of the dollar by 12-14 percent against world's major currencies. The weakening of the dollar means that Japan, for example, which holds nearly 900 billion dollars in US securities, has lost nearly 100 billion dollars," he said.
 
I think the major blood bath is passed for the next month or so. No solid plan approval from Washington by mid October and all bets are off.
 
Just watched the Asian markets on Bloomberg. The term Lehman moment is becoming common the Korean exchange had what was described as a bad month in one day. Chinese economic data looks bad especially in regards to food inflation and particularly pork which is the major source of protein. (I thought it was soybeans but maybe the Chinese are using the tons of soybeans they import from South America to feed the pigs, I don't know.) Low skill wages are increasing much faster than inflation, while college labor is sinking. If China breaks that's about all she wrote.
 
Burton Malkiel says it better than I can:
No one has ever become rich by being a long-term bear on the fortunes of the United States, and I doubt that anyone will do so in the future. This is still the most flexible and innovative economy in the world.

I will be getting back into stocks at some point in the near future. I have made double digit returns in long term treasuries and will re-balance soon. I am long term bullish on America. As Churchill said - "America will always do the right thing, but only after exhausting all other options". I think we are close to the point were we've exhausted all the other options. I see a wave of fiscal conservatism sweeping the nation.

I'm long term bullish too.

We've been through worse in America. We'll get through this.
 

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