Quantum Windbag
Gold Member
- May 9, 2010
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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.