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U.S. loses AAA credit rating, downgraded from S&P
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U.S. loses AAA credit rating, downgraded from S&P

  #31 (permalink)
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I would agree with your thoughts on money market funds. There is the potential for a breaking of the buck. But Bond Funds are only a slice of the US treasury ownership pie that this downgrade affects. There are huge pension funds, endowment funds, sovereign funds, bank holdings for collateral that has potentially created an adverse/material event that can have a knee-jerk scramble to rebalance their positions to other AAA rated securities. As mentioned before, the question is which agencies will these institutions lean more on? From being in the investment management business my entire career, I can assure you that I've seen a majority of these entities place a high emphasis on the S&P's ratings. That is why this is huge.

I think everyone cares about what the S&P has to say. Doesn't mean everyone needs to comment on it though. As for what the market opens at, who cares. Just trade what you see on your screen...

When I said "Bond Funds", I didn't mean one specific type of fund, but every fund that has a mandate to hold bonds - pension fund, insurance co. holdings, the lot of 'em. Sorry for any confusion.

Anyway, two points to the discussion:

Firstly, collateral. I've seen a couple of people ask if the downgrade means Banks will be required to up their capital ratios, and IMO this has practically 0% chance of happening. To up capital requirements now would be the work of someone deliberately trying to screw the whole american economy.

Secondly, specific ratings: Sure, S&P are the biggest fish in the pond, but what Moody's does matters too. an S&P downgrade alone isn't enough to pull the plug.

And, going on from a point I made earlier, there isn't actually anywhere else to put the money anyway. The only market that compares in size to the US is Japan, who of course are not AAA either. That means you have Germany, Italy, France, China, Brazil(?), and the UK left (all of which would have to double their issuance to accomodate the funds leaving US paper, and anyway, don't you think we have our own problems?!?!)

Another thing... if it does look like fire sale conditions are emerginf, then funds (all of em) are likely just to overide the mandate bacause of the severe price penalty incurred fr trading in such cirmumstances - OK, there's a downgrade, but that doesn't mean it's OK to accept 70 cents on the dollar just bacause everyone is trying to squeeze through the same door at the same time!

(and one last thing, I heard that US investors are often constrained to >AA, not necessarily AAA)

So, in conclusion, the downgrade sure makes good headlines and political ammunition (which will become important next year), but in terms of market operations, it is largely academic.

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  #32 (permalink)
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Just purely for fun, I would say we might see a 1,000 point sell off next week on the dow, and then a short term bottom formed over the next few weeks, leading to new highs. Say it with me, "dow 15,000 here we come". And "I love QE42!"

Mike

don't be surprised if not even qe3 shows up. inflation might be a problem here.

they need to come up with another brilliant idea to save the economy.

one thing they might do if bonds get under pressure from the downgrade, is to swap some of their holdings in shorter bonds for a longer maturity. of course this alone will not help much.

lets just hope china will be modest with their decision. what I read so far, they are not very happy.

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  #33 (permalink)
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Silvester17 View Post
don't be surprised if not even qe3 shows up. inflation might be a problem here.

they need to come up with another brilliant idea to save the economy.

one thing they might do if bonds get under pressure from the downgrade, is to swap some of their holdings in shorter bonds for a longer maturity. of course this alone will not help much.

lets just hope china will be modest with their decision. what I read so far, they are not very happy.

I read interesting comment this week about the possibility of Bernanke raising the inflation target...

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  #34 (permalink)
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I think you guys are missing the wood for the trees.

The short term implications, such as what bond funds required to hold AAA paper will do, is done and dusted. For too long has the possibility of a downgrade been on the table for long enough for institutions and regulators to either prepare for adapting / exempting AAA mandates. And, in all honestly, it isn't the bond funds that are the immediate problem - it's the money market funds that pose the nearest threat. Still, come Monday morning I don't think the wheels are going to fall off the SP500 (if anything, corporates become more attractive), and the US bond market is the deepest in the world - all $700 trillion of it - and so, frankly, there isn't anywhere else to put your money anyway.

The importance of the downgrade is how it will be played out in the 2012 election; in their report, S&P make it plain that the deficit problems that are blossoming now were planted many years ago, and that the shambles of the past month has cemented the rating as confidence in bipartisan relationships has crumbled...

"The political brinksmanship of recent months highlights what we see as
America's governance and policymaking becoming less stable, less effective,
and less predictable than what we previously believed. The statutory debt
ceiling and the threat of default have become political bargaining chips in
the debate over fiscal policy."

I posted the actual report in the elite section, but so far no-one seems to give a shit what S&P actually say, just make guesses on where the spoos will open...


First of all, this a trading forum, so you can't blame people for being more interested in tomorrow's events than next year's.

Secondly, this message board is largely built around indicators and price action trading. The vast majority seem to have little interest in finance/economics. They only focus on charts, and some squiggly lines on them, ignoring everything else. Of course the vast majority also lose money, so there might a correlation there...

I have read the report, I posted a link to it in the chat when it was published yesterday. I also read the statement that they put out mid-july, warning about a potential downgrade this fall. But in today's world it is very optimistic to assume most people will read something like that, most people can't even be bothered to watch the news anymore. They rely on some talking head like Bill O'Reilly or Chris Matthews to digest the news for them and shape it to fit their existing world view. Intelligent thought is only found in niche magazines and selected social circles these days.. I have given up on the world a long time ago...

As for how this will affect the rhetoric during next year's election campaigns, do you really think it will change for the better? That suddenly the Tea Party, Green Party and the rest stand will stand in solidarity to get the nation back on track? Or is it more likely that we will see even more fierce polemics as the Tea Party asserts that the downgrade is a result of evil Obama's communistic reign, while the democrats claim this is what happens when corporations and the rich don't have to pay taxes...

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  #35 (permalink)
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In addendum

You are, of course, correct about the US being the de facto market, and money has no other place to go. At least not yet...

I am most interested in how the other rating agencies will react to this...

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  #36 (permalink)
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I would agree with your thoughts on money market funds. There is the potential for a breaking of the buck. But Bond Funds are only a slice of the US treasury ownership pie that this downgrade affects. There are ... bank holdings for collateral that has potentially created an adverse/material event that can have a knee-jerk scramble to rebalance their positions to other AAA rated securities.

The OCC, the Fed, and the FDIC, will apparently pretend what S&P issued is meaningless, to wit:

OCC: Agencies Issue Guidance on Federal Debt
FDIC: Press Releases - PR-133-2011 8/5/2011
FRB: Press Release--Agencies Issue Guidance on Federal Debt--August 5, 2011

Or as one jokester once stated, 'May the farce be with you. Always.'

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  #37 (permalink)
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On a trading perspective, what would you think is going to happen in the near future? Which assets are going to have the biggest response and any guesses in which direction is the movement going to be? What it seems to me is that I'm not going to look for any longs in the coming days ...

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  #38 (permalink)
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now, honestly, this is never a trade I would take, for a whole host of reasons (such as I don't trade indices), but long the ES here with 1st target 1185 2nd target 1200 with stops below the present low + some vol adjustment looks like a lottery ticket worth the commission you will pay for it.

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  #39 (permalink)
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Silvester17 View Post
don't be surprised if not even qe3 shows up. inflation might be a problem here.

they need to come up with another brilliant idea to save the economy.

one thing they might do if bonds get under pressure from the downgrade, is to swap some of their holdings in shorter bonds for a longer maturity. of course this alone will not help much.

lets just hope china will be modest with their decision. what I read so far, they are not very happy.

sorry for being off topic.

this is just to show how well people get informed here at futures.io (formerly BMT).

early august someone wrote there'll be no qe3 (as most traders believed there would be at least another round). and even operation twist was already mentioned.

thank you futures.io (formerly BMT).

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  #40 (permalink)
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Silvester17 View Post
thank you futures.io (formerly BMT).

Thanks for helping with that

https://futures.io/traders-hideout/13673-lets-do-operation-twist.html

Mike

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