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Guest Post: So Why Is The Initial Reaction Of The S&P Downgrade Of Treasuries For Treasury Bond Prices To Go Up?

Submitted by Tyler Durden on 08/08/2011 14:59 -0400

Submitted by Tim McCormick Of Frost National

So why is the initial reaction of the S&P downgrade of Treasuries for Treasury bond prices to go up?

The S&P downgrade was not as much a comment on the numbers of credit service as a comment on the political process. The political process is about confronting the probability of a hyper-inflationary collapse of our currency if fiscal irresponsibility, entitlement spending and bank bailout mentality are not addressed. If the credit rating firms had continued the charade of AAA quality, it would merely enable the not sustainable march toward hyper-inflation. Ultimately, the S&P downgrade of Treasuries is a downgrade of all dollar denominated assets. If we can print dollars to pay Treasury debt, it is the currency that is at risk. A nominal default of Treasury obligations is not going to happen. Yet, a real default as a currency event is the risk. In order to save the currency, we must sacrifice the money center banks. A sacrifice of the international banking system is a deflationary event. For Treasuries to rally in a flight to quality as a market reaction to their own downgrade is a flight to the relative safety that remains. Anticipation of the deflationary political discipline of an S&P downgrade is the rational reaction of capital flight away from securities propped up by the reflationary status quo.

Since the U.S. and European governments reaction to the 2007-2009 private sector credit crises was to reflate bank collateral assets by replacing the private sector credit bubble with a public sector credit bubble, the limits to this misguided reflationary policy are now more political than financial. Policy choices are clearly between a deflationary deleveraging/purging of malinvestment or a reflationary protection of the status quo international money center banking system to the detriment of wage earner and pensioner standards of living. Reflationary policies of fiscal and monetary stimulus are increasingly viewed as a bi-flationary regressive tax. The shotgun approach of monetary policy harms people to save banks.

Demographics of the developed world have lead to the legacy banking system reaching for return outside of domestic economic growth. European banking system assets far exceed those justified by domestic activity. This over-reach by the legacy system is compounded by the various erroneous Keynesian monetarist schemes of credit promotion that have now saddled the U.S. and European system with uneconomic credit. Rather than recognize this policy error and allow the eradication of this excess credit in a deleveraging process, the powers of the status quo have chosen to compound their error with a public sector credit bubble.

In the near term an S&P downgrade of Treasuries lowers the probability of a U.S. bailout of the European banking system. The European banking system is the vortex of the deleveraging process. Their relatively large assets to GDP makes them vulnerable. The lack of a European political institution to complement the monetary union of the Euro hobbles the resolution process.

This downgrade exposes the limits of U.S political capacity and mandate to manage the international financial system.

One would think that the reaction of our Asian and Arabic creditors would be to avoid our debt. Yet, in the short run they recognize that the liquidity of dollar assets still commands a premium over alternatives. It is the long run implications of loss of world reserve currency status to precious metals wherein the market reaction lies. These creditors are sick of the dollar recycling system and cheer on Standard & Poor's for
accelerating an alternative.

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Mon, 08/08/2011 - 15:03 | 1538481 Flakmeister

Maybe because fat rats can only squeeze through big holes....

Mon, 08/08/2011 - 15:09 | 1538516 BaBaBouy

DUMP GIETHNER...

AND Commedian Jay Carney.

Fecking Clowns in charge...

Mon, 08/08/2011 - 15:31 | 1538652 MillionDollarBonus_

People laughed at me for my bullish stance on the long-bond. I boldly pronounced my support for president Obama and those congressmen who had the courage to make the tough choice of raising the debt ceilong, despite the inevitable childish attacks from the doomer libertarians. And in the end I was rewarded for standing up for principles of bravery and patriotism.

Mon, 08/08/2011 - 15:37 | 1538686 Flakmeister

Good for you... take your profits and run before the Bernank speaks tomorrow

Mon, 08/08/2011 - 15:40 | 1538701 Greater Fool

Ha. Just rotated some out of cash and Tsy's to buy equity with a higher weighting on growth stocks.

Will do it again if we see another big leg down. Love being able to buy stocks at reasonable prices for a change.

Mon, 08/08/2011 - 15:45 | 1538743 Flakmeister

Energy sector MLPs are very attractive at these levels...LINN, PSE are on sale. Straight equities like EXXI got bitchslapped and I have been buying...

Mon, 08/08/2011 - 15:55 | 1538818 legal eagle

I am assuming you missed the sarcasm button, since your entire post is horseshit. Did the right thing, thanks for the chuckle. Yes, you shall be rewarded.

Mon, 08/08/2011 - 15:08 | 1538484 bigdumbnugly

this bugs me about how cnbc and others are attacking the s&p downgrade...

their main argument is: the US can't default because it is the reserve currency and can print any amount of money needed. therefore isn't this downgrade silly?

i ask, if this is so, why bother having s&p, fitch, or moody's rate them anyway? what would be the purpose?

Mon, 08/08/2011 - 15:16 | 1538545 HpDeskjet

And the funny thing is, this argument is not even true... Printing will cause interest rates to rise immediately (see what happened during qe1 and 2) and with the short maturity of the US Gov Debt, this equals suicide

Mon, 08/08/2011 - 15:17 | 1538558 Anonymouse

Spot on. If the arrows were working, you would have a +1.

Absolutely disgraceful. The administration is the worst of all, and showing no leadership. Simply whining and complaining with fake anger. Unless the anger is real, which shows absolute cluelessness. Actually I think I'll go with that

CNBC's S&P and Liechtenstein bashing shows how 1) clueless and 2) conflicted they are.

Now they all are stumping hard for QE3.

What fools these mortals be

Mon, 08/08/2011 - 15:05 | 1538486 Debtless

Other than the fact i've been all in on VXX the last 4 days, i revel in the fact that the banks are having their little dicks handed to them again today. And that their corrupt executive's personal shares are falling like stones.

Mon, 08/08/2011 - 17:02 | 1539386 steelhead23

I would cheer loud and long if the personal wealth of the likes of Fuld, Dimon, and Blankfein were to suffer losses. Unfortunately, I doubt this will happen. Instead, unless the TBTFs actually fail, they will get a paltry couple mill each to ease the pain. Quelle horreur!

I gotta come out of the closet here on ZH - I happen to believe that for-profit banking inevitably becomes a Ponzi scheme, that finance is a utility function in the economy, and that true economic freedom will only come when all commercial banks are organized as not-for-profit entities. Yeah, I know you true believers disagree with me. Look around you, then carefully dissect my thesis and show me how wrong I am. That is, right after you short the hell out of the financials!

Mon, 08/08/2011 - 15:05 | 1538487 Mr Lennon Hendrix

What is the derivative for "Hope and Change"? It's not "zero", is it?

Mon, 08/08/2011 - 15:22 | 1538582 Shell Game

On a long enough timeline it is...

Mon, 08/08/2011 - 15:22 | 1538583 Sudden Debt

Medicare and Social Security.

Mon, 08/08/2011 - 15:05 | 1538491 Misean

It's a bank run. A dash to cash and the most liquid securities.

Mon, 08/08/2011 - 15:08 | 1538504 MsCreant

As in "The Fed will always buy it back?"

How bout the FED is buying this shit and can make it any price they want it to be???

Mon, 08/08/2011 - 15:18 | 1538562 Spitzer

This is how bubbles pop. Buying climaxes end bull markets.

Tue, 08/09/2011 - 01:31 | 1541443 MsCreant

So then what of gold, now?

Mon, 08/08/2011 - 15:09 | 1538510 TonyBoomBoom

Are you a Misesian? Give the man his credit by at least calling yourself the proper name for a follower of his!

Mon, 08/08/2011 - 15:13 | 1538538 Misean

Yes, well, a man with your handle such as yours is one who's advice on handles I shall take very seriously.

Mon, 08/08/2011 - 15:18 | 1538557 TonyBoomBoom

I was so absorbed in my quip about your handle I forgot to leave out the point that I agree with your sentence which summarized the article beautifully.

And no matter what some mean rating agency says, USA will always be AAA in my heart.

Mon, 08/08/2011 - 15:51 | 1538776 IQ 145

Well, isn't that just precious.

Mon, 08/08/2011 - 15:07 | 1538498 Westcoastliberal

Checked with Orbitz, all flights to both safety and quality are all booked up. What now?

Mon, 08/08/2011 - 15:15 | 1538542 Tortfeasor

For only four easy payments of $39.95, Simon Black has your answer.

Mon, 08/08/2011 - 15:16 | 1538547 goldsaver

Why? easy, the HFT algos have no other programmed options.

Mon, 08/08/2011 - 15:17 | 1538553 Spitzer

Because this is how bubbles pop. They must go beyhold your wildest dreams like treasuries are right now.

Mon, 08/08/2011 - 15:17 | 1538559 jjsilver

Flight to liquidity my ass!! These criminals create your reality.

Greenspan: US "Can Pay Any Debt It Has Because We Can Always Print Money"

http://www.youtube.com/watch?v=fbI_6m75wZU

Mon, 08/08/2011 - 15:23 | 1538586 Anonymouse

Now we can see why he is such a genius. Greenspan (and his incompetent hunchback lab assistant The Bernank) have pulled off what no evil genius could do

- Not Hitler

- Not Stalin

- Not Mao

- Not Dr. Evil

- Not Lex Luthor

- Not Mojo Jojo

None could defeat the USofA. But Greenspan did it in barely over a decade

Greenspan: "Just print ...." <pinky to corner of mouth> "one quadrillion dollars! Bwa-ha-ha!"

Mon, 08/08/2011 - 15:18 | 1538561 besnook

actually the dollar has been devalued making everything paid for in dollars cost more.... like gold.

Mon, 08/08/2011 - 15:18 | 1538567 Anonymouse

PPT is GO!

Mon, 08/08/2011 - 15:23 | 1538585 Gringo Viejo

US Treasuries...Flight To Insolvency.

Mon, 08/08/2011 - 15:28 | 1538632 Missiondweller

Yes. Break up the money center banks. Same way we did with AT&T or Standard Oil. Trust busting is what we need to re-learn.

And bring bacl Glass-Steagal.

Mon, 08/08/2011 - 15:48 | 1538753 Dr. Engali

We need to break up congress too. -The more corrupt the state the more it legislates- Cornelius Tacitus

Mon, 08/08/2011 - 15:31 | 1538637 MillionDollarBonus_

Mon, 08/08/2011 - 15:45 | 1538698 Downtoolong

Policy choices are clearly between a deflationary deleveraging/purging of malinvestment or a reflationary protection of the status quo international money center banking system to the detriment of wage earner and pensioner standards of living.

Is there any doubt which way our government leans on this one? That’s why I’m still baffled a bit by the big flight to Treasuries (negative real returns) today. Maybe it’s more about the answer to this question: When the Fed does announce QE3, what will they be buying with all the new money they print?

Mon, 08/08/2011 - 15:57 | 1538841 IQ 145

When the DOW goes down, the T's go up. This is old, old, school wisdom. It's been this way forever; or a long time anyway. When you dump your equity position the money has to go somewhere. The probility is that this is a short term phenomenon. The long Bond should start down-ticking later this week.

Mon, 08/08/2011 - 17:24 | 1539491 Alpha Monkey

I wonder if new wisdom will say $ needs to go into G instead of T.

Mon, 08/08/2011 - 17:27 | 1539497 Alpha Monkey

If insider selling has been mostly on the increase, and everyone else seemed to be withdrawing, who was doing the buying to support price levels? Perhaps a significant portion of the market is owned by the central planners who are just sloshing money back and forth. After all, isn't it their computers that are dictating most of this?

Mon, 08/08/2011 - 15:43 | 1538726 Payable on Death

Washington gridlock comes from the people. The fix requires cuts to SS and Medicare. Demographically and politically, these cuts are impossible. I watched 2.5 hours of Ann Coulter on Book TV this weekend, and two (othwerwise) conservative fellows called in saying they deserve their govenrnment benefits. I have solidly conservative friends who want their promised SS and Medicare. They paid in and they want the promise kept. These are the people that should be (have been) on the side of austerity. It is not relevant whether they are correct, all that matters is that every day 1000s of people join their ranks simply by aging. At the other end of the spectrum how do you think food stamp recipents feel about budget cuts?

BTW, I remember Boehner and Ryan both talking about "having a conversation with the American people". This was after the 2010 election and as they were being challenged about entitlement reform. They know change this big must have the support of the people. The debt ceiling debate put these issues front and center, and for all I can tell, the take away is that the Tea Party is bad--nothing about the fundamentals.

There are 2 paths to the fix: 1) orderly and by demand of the people, as Canada in the late 90s; or 2) by the market, which is to say some sort of financial reset.

Mon, 08/08/2011 - 15:51 | 1538780 G. Marx

Ahh, a proud toady of the state and guardian of the establishment. I've always wanted to ask your ilk, what's it like licking the boot which rest upon your neck?

Mon, 08/08/2011 - 15:52 | 1538793 slewie the pi-rat

what about "Frost National" dude?

"This downgrade exposes the limits of U.S political capacity and mandate to manage the international financial system."

okey-dokey. thank you, texas!

Mon, 08/08/2011 - 23:28 | 1540375 hangemhigh

TO: by slewie the pi-rat
on Mon, 08/08/2011 - 15:52

"This downgrade exposes the limits of U.S political capacity and mandate to manage the international financial system."

slewie: if you'll allow me to piggy back your comment, sir:

"The S&P downgrade was not as much a comment on the numbers of credit service as a comment on the political process"

"A nominal default of Treasury obligations is not going to happen. Yet, a real default as a currency event is the risk. In order to save the currency, we must sacrifice the money center banks"

"European banking system assets far exceed those justified by domestic activity. This over-reach by the legacy system is compounded by the various erroneous Keynesian monetarist schemes of credit promotion that have now saddled the U.S. and European system with uneconomic credit."

"In the near term an S&P downgrade of Treasuries lowers the probability of a U.S. bailout of the European banking system"

this is one of the best commentaries i've seen on this rats nest of disinformation: the down grade is based on political factors. the problem is the brain dead morons that we the people put in office. they are too dumb to see that what's at risk is the currency. the currency is the basic share of the home grown enterprise that we call america. to save the currency you have to jettison the banksta crime cartel.

also of note, this is the first time i have seen anyone use the spot on term "keynesian monetarist schemes" which perfectly describes the mangled, ad hoc mess that has empowered the looting class.

finally, much of what has occurred (QE2: $630B to ofshore pd's) has been about using the euro banksters to save the reserve currency's bacon. if the 'frost national dude' is right, that is now less likely.

hope you don't mind the piggyback, slewie, my man, and you're right about the source of this message....lone star homies don't be happy..................

Tue, 08/09/2011 - 00:08 | 1541140 TimmyM

Why thank you "hangemhigh". Sometimes I rant.
Tim

Mon, 08/08/2011 - 15:54 | 1538813 Duck

Aren't Treasuries denominated in U.S. dollars too, or did I miss something?

Mon, 08/08/2011 - 15:58 | 1538855 phaesed

To above.... US Dollars are actually treasury derivatives.... but that's a different topic. But the constant rant against Treasuries continues to make me laugh.... after all, why is everyone shorting the bull market?

Mon, 08/08/2011 - 16:21 | 1539074 mendigo

the msm and politician are blaming S&P for market behavior

so the entity that first acknowledges the problem is actually the cause of the problem - if it weren't for S&P everything would be just peachy

as krugman points-out S&P was negligent in it's valuations last fiasco so what the fuck is their problem?

Mon, 08/08/2011 - 16:25 | 1539109 mendigo

where oh where is our guardian angle ben - has he forsaken us?

i thought all things could only fall upward

i think it is something tyler said

Mon, 08/08/2011 - 16:52 | 1539317 Djirk

Duetschland uber Alles...Angela mein Liebe

Mon, 08/08/2011 - 17:25 | 1539493 TheJudge2012

People don't rush to put their money into treasuries with a downgrade. That's nuts. But colluding central banks do with cheap money they print to prop up the dollar.

Tue, 08/09/2011 - 01:33 | 1541451 MsCreant

That's what I was trying to say above with the comment about Ben buying them and deciding the price.

Mon, 08/08/2011 - 17:37 | 1539545 mudduck

Mr. McCormick; It is not possible to know which banks (European, Asian, Martian, etc.) the fed will bail out or let fail until you know how much of the fed each bank owns (foreign or domestic).

Mon, 08/08/2011 - 18:56 | 1539818 Outlaw Of The W...