Market Craps on Debt Ceiling Deal

Funny that shortly after the U.S. Congress passed the largest – and arguably most catastrophically stupid – deficit reduction package in history, the market promptly reacted by taking a nosedive.

Apparently, the ugly, job-killing “compromise” hastily cobbled together by U.S. lawmakers before fleeing Washington for a month-long vacation wasn’t sufficiently draconian or austere enough to placate the leading rating agencies on Wall Street. Which is rather curious when one considers that these same rating agencies are the very same firms that readily gave their triple-A imprimatur to the collateralized junk and other toxic inventions fabricated by their double-dealing investment banking clients before the whole egregious scam they were intimately complicit in collapsed like a house of cards back in 2008.

So why is anyone listening to them now? Indeed, why are they even still in the business of proffering their demonstrably worthless approvals?


9 Replies to “Market Craps on Debt Ceiling Deal”

  1. Sadly, RT, because their opinion matters.

    A drop in the U.S. credit rating equals a precipitous increase in interest rates which equals another recession.

    The reality is that the U.S. has been spending money like drunken sailors – unfortunately on matters that don’t improve productivity and social cohesion (i.e. volunteering to be the policeman for the world), while taxing corporations far beyond rates competitive with most of the developed nations, which they’ve tried to overcome by a patchwork of loop-holes and exemptions.

    It’s a big mess – and special interests on all sides of the spectrum aren’t going to make the fix easy – or maybe even possible.

  2. “So why is anyone listening to them now?”

    Because people have the attention spans of gnats, thanks to being continually distracted and dumbed down by bright shiny goofy things like The Bachelorette and, as George Carlin once complained, “running shoes with lights in them”. They can’t be expected to remember something as trivial as the co-conspirators behind a worldwide financial meltdown.

    The stock market was painful to watch this morning: after a couple of lame attempts to heave itself up, it got on the Medic Alert and told an emergency worker that it had fallen and couldn’t get up. Due to cutbacks it will be waiting awhile for an ambulance…

  3. The market might not be reacting to the credit rating agencies pronouncements at all. They may be looking at a political debt deal that calls for serious reductions in US federal spending, which will not do its depressed economy any good at the moment. So the markets are reacting to the forecast of less spending by trending down.

  4. The “Triple A” rating of US debt has been reaffirmed, (but with a “negative outlook”).

    “Triple A” for now. The rating agencies owed the US gov’t one for not investigating the “Triple A” ratings given by them to the toxic waste of mtg-backed securities, et al.

  5. Rob: There’s a huge difference between statutory rates of corporate taxation and effective rates. The innumerable schemes and loopholes in the U.S. Tax Code enable corporations in that country to evade paying anywhere near the “uncompetitive” rates you allude to. Lowering the rate of corporate tax while eliminating all of the tax expenditures (i.e., subsidies) that have accreted over the years in the regulations at the behest of special interests and corporate lobbyists may help solve the problem, but given that the U.S. government is “bought and paid for” by these same corporations, that’s unlikely to happen.

  6. The difficulty about stock market fluctuations like this is that it plays right into common cognitive biases. Essentially, any explanation as to why the stock plunged will be indicative more so of the narrative the person is willing to advance. Dan Gardner has covered this as well as my readings into behavioural investing. Presumably based on the efficient market hypothesis, an open market reflects all the available information. If that were true in its most extended logical consequence, there would be no trading at all. The fact of the matter is that that human condition is quite irrational, yet the assumption in finance is that humans are rational and that forecasting and every move in the market can be account for. One passage in one of my books of behavioural investing had an interview with one of the Wall Street investment management firms in which the manager admitted that forecasting metrics were practically useless. The only reason why they are included is because their clients demand them. That is ignoring the usual perils of hindsight and confirmation bias. The only thing I reserve is that business can “prepare,” which can be reflected in market moves, but given the glossy reports I receive, companies are chock full with earnings forecasts and macroeconomic bets upon which they would base their current financial decisions. That is the source of the irrationality in markets, and it is the big elephant in the room people tend to ignore. After all, if most of the talking heads on financial reporting were honest, you would see a huge reduction in segments featuring “reactions” or “your view going forward.” As a side note, if you want nerdy drinking game, throw on BNN and take drink every time somebody says “going forward.” If you start after work, you will probably be drunk before supper time.

    I do recognize that behavioural finance is one of those shiny new fields, but it can offer some insight. I would suggest starting with primer from the The LIttle Book series. The Little Book on Behavioural Investing is only 200 pages, and you can get through that in an evening. I do caution one thing: It is written by, what I can understand from reading between the lines, a person inclined to value investing, but the citations of the cognitive studies and the market data were fully referenced.

  7. They may be looking at a political debt deal that calls for serious reductions in US federal spending, which will not do its depressed economy any good at the moment. So the markets are reacting to the forecast of less spending by trending down.

    Yes the markets may have been responding to the forecasted decrease in spending–the subsequent rebound that was triggered by the promise to keep interest rates at 0% until 2013 and the discussion of QE3 gives credence to this.

    However to suggest that the reduction in spending “will not do [the US] any good” is quite wrong. Suggesting that cutting expenditures is not the remedy to a debt problem is akin to ignoring the water that is filling the hull of a sinking ship. There is only one way to avoid sinking, and that is to stop the flow of water. If you can’t pay your bills, increasing spending will never be the answer–outside of some left-wing-nut fantasy world.

  8. (…Or perhaps, if the rushing water is not just spending but debt, which includes the income side to the equation, it’s time to plug a few [loop]holes?)

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s