If there were ever a deep lagging indicator, it is a downgrade by a ratings agency. While the housing market peaked in 2006, these despised institutions didn’t get around to marking paper down from triple “A” to junk until four years later.
Then in August, 2011, Standard and Poor’s downgraded U.S. Treasury bonds. After that, they went up like a rocket to a new 60 year low, with the yield on the ten year bond plunging from 2.8% to an eye popping 1.38%. Could it be that this is a simple typo? Did an underpaid and errant typist confuse the word “down” for “up”?
I now hear that Moody’s is on the verge of downgrading U.S. debt again if it goes over the fiscal cliff. Part of the reason behind the Moody’s move is that they have completely lost faith in the American political system. I totally sympathize with them. The Republicans now have a vested interest in crashing the economy so they can blame it on Obama and win the presidency.
So there is zero chance of a TARP 2 getting through the congress in the next financial crisis and saving the banks once again. Tough luck if you and I are unwilling passengers in this demolition derby. Can you blame investors for throwing up their hands in disgust and walking away from equities, as they appear to be doing in large numbers?
Here is another way to look at the banks. Much of the bank meltdown that has occurred since 2008 is due to the enormous Treasury bond rally. The incredibly flat yield curve that has resulted squeezes the free lunch that the banks have been relying on to recapitalize themselves. So shorting banks here is the risk equivalent of initiating new longs in bonds at these levels. Neither is a good idea.
Does Moody’s Need a New Typist?