Gyroscopic Investing

This is exactly the opposite of what many people would have predicted and is one more reason to pay no attention to the ratings agencies.

The ratings agencies have become experts at closing the gate after the horses have escaped.

Yeah. What a total joke. It's amazing that these agencies are still in business. We outsourced all the risk analysis to them and they fail us way too often.

This price action tells us that no one cares what they think anymore. That's probably a healthy sign for the market returning to rationality.

I almost wonder whether in this case they have to be late to the party with a downgrade like this.  The government, after all, controls whether they are even chartered to serve as a ratings agency.  How could you ever give a fair rating to an entity that could end your entire business with a snap of its fingers?

Lone Wolf wrote: I almost wonder whether in this case they have to be late to the party with a downgrade like this.  The government, after all, controls whether they are even chartered to serve as a ratings agency.  How could you ever give a fair rating to an entity that could end your entire business with a snap of its fingers?

Or how about just, as a matter of policy, provide no rating at all on any entity that might involve a conflict of interest for the ratings agency?

The ratings agencies' contribution to market efficiency in the last few years has been about as impressive as a group of mimes trying to do a radio show.

MediumTex wrote: Or how about just, as a matter of policy, provide no rating at all on any entity that might involve a conflict of interest for the ratings agency?

That makes tons and tons of sense.  What could be a bigger conflict of interest than providing ratings on an entity that has their finger on your existential switch?

I don't understand. The S&P issued a warning.  The administration lobbied against the warning.  The warning ought to make it harder for the Federal government to borrow money.  Somehow it has not, at least not yet.

Now....If the S&P were a toothless entity whose opinion was bought and paid for by the feds, then how could it/why would it issue such a warning? If the warning was perniciously delayed but already baked into market expectations, why would the delay be of concern to anyone and why would yields still be so low?  If the rap against rating agencies is that they sugar coat the truth, then this mere warning should be taken as a signal that things are in even worse shape than previously imagined. Yet, that is not how folks here are reading it.

See-no-evil rating agencies helped bring on the 2008 market meltdown.  So it's hard to understand how antipathy toward rating agencies can coexist with a no-big-deal attitude toward the national debt.  Color me confused.  Anyone want to connect the dots?

Here's my problem... rating the government bonds of a reserve/fiat currency government involves macroeconomic nuances that many of us even have trouble understanding on a theoretical level, much less in-depth.

Meanwhile, rating a corporate or muni bond has mostly to do with their ability to pay you back if I'm not mistaken... and since their debt-service involve balance-sheet and cash-flow restraints that our federal government simply doesn't have, I can't imagine an agency schooled in judging one is necessarily knowledgable in rating the other.

Further, if U.S. "default risk" is really mostly wrapped into "inflation risk," then why the heck aren't ALL bonds downgraded since they're all carrying the treasurys' inflation risk + default risk to boot.  It's not like only treasury $$ are inflated away and interest paid by Wal-Mart holds its value.  I guess that leads to the question of whether inflation risk is judged at all by the bond rating agencies.... do they simply rate something on its default risk?

MediumTex wrote: This is exactly the opposite of what many people would have predicted and is one more reason to pay no attention to the ratings agencies.

aren't we far to close to draw a meaningful conclusion on how this plays out?

The ratings agencies have become experts at closing the gate after the horses have escaped.

naturally...

I see that S&P downgraded Japan today.

Yields in the 5-10 year part of the curve fell; the rest looks mostly unchanged.

I wonder where S&P will take its Volkswagen-full-of-clowns-ratings-show next.