Anyone who’s been seriously securities pricing over the last several years has seen a series of bizarre pricing anomalies in securities as markets have gone from boom to bust- back and forth. Taken individually, any of these pricing anomalies as the market moves would be a challenge to Efficient Market Hypothesis (EMH) notion that the current price of a security reflects the most current analysis of information regarding that security. EMH proponents have a hard time explaining the internet bubble, or really any security that seems to defy rational explanation.
Still, people put stock in the pricing mechanism of the marketplace and see some wisdom in it. When gold was languishing in comparison to the US Dollar through the 1980s and 90s, the rational explanation was that people no longer felt it was a safe haven. Now, conspiracy minded Libertarians such as myself felt that there was a greater conspiracy at work on the part of the powers that be to get people to believe in the US Dollar as the ultimate safe haven rather than gold. There are certain strange coincidences, such as the decline of the spot price of gold in the wake of most major political news (such as the start of Desert Storm or 9/11) which would be occasions where you would thing it would go up.
Now I know most people find conspiracy theories rather hokey, but when you stop and think about this one it makes a lot of sense. The US Dollar is the financial underpinning of modern world. Of course, anyone who knows history knows that it can’t go on forever. At some point, some new system will come along and take it’s place. Put another way, history has shown that the long term value of every fiat money ever created is zero. Of course, the current powers that be have a very real vested interest in prolonging the lifespan of the current financial system as long as humanly possible. OF COURSE, they’re going to manipulate markets to try to bring these ends about. Given that it’s the stated policy of the Federal Reserve to manipulate the US Government Bond market to create the interest rate environment that the Fed Governors want, how naive to you have to be to think these same people wouldn’t be manipulating other securities like gold?
But I’m actually getting off track of what I wanted to talk about today, which is how US Treasury Bonds performed on the first day of trading after the S&P announced a downgrade for them. They staged a massive rally. Quite curious indeed?
Never in the history of the marketplace have I heard of a massive rally in demand take place in terms of a product or service when a legitimate organization announced their concerns about that particular product or service, but that’s exactly what happened today. Of course, markets don’t give a reason as to their price movements, so the rest of us are left to guess.
The way I see it, one of two things happened. One explanation would be that people were so spooked by the S&P downgrading US Treasuries that they immediately put their money into the very investment that was, in fact, being downgraded. The second would be the that Federal Reserve, an organization which already has a mandate to purchase US Treasury bonds, stepped into the breech and started snapping up all the Treasuries they could get their hands on in order to convince people they were still a good investment. It’s probably some third story that I’m unaware of, but, between the two, I know which one I’m putting my money on.
Or perhaps the downgrade wasn’t that significant to the markets because (a) S&P’s argument had already been made back in April, and (b) the “rating” of Treasury bonds is only really relevant in relationship to the (market’s collective) “rating” of other alternative investments? No matter what S&P says or doesn’t say, I think probably the relevant information is how risky Treasuries look in comparison to “everything else available in the US markets”. If everything else in the markets looks more risky, then when S&P tells us that Treasuries are also riskier than they used to be, (and this was fairly obvious to anyone reading the news about the debt-ceiling issues, right?) well, it doesn’t have much effect in the real world, now does it?
According to Zero Hedge, countries outside of the U.S. dumped 74 billion dollars in U.S. Treasuries, most of it over the weekend:
“Over the weekend, we observed the perplexing sell off of $56 billion in US Treasurys courtesy of weekly disclosure in the Fed’s custodial account (source: H.4.1) and speculated if this may be due to an asset rotation, under duress or otherwise, out of bonds and into stocks, to prevent the collapse of the global ponzi (because when the BRICs tell the IMF to boost its bailout capacity you know it is global). We also proposed a far simpler theory: “the dreaded D-day in which foreign official and private investors finally start offloading their $2.7 trillion in Treasurys with impunity (although not with the element of surprise – China has made it abundantly clear it will sell its Treasury holdings, the only question is when), has finally arrived.” In hindsight the Occam’s Razor should have been applied. Little did we know 5 short days ago just how violent the reaction by China would be (both post and pre-facto) to the Senate decision to propose a law for all out trade warfare with China. Now we know – in the week ended October 12, a further $17.7 billion was “removed” from the Fed’s custodial Treasury account, meaning that someone, somewhere is very displeased with US paper, and, far more importantly, what it represents, and wants to make their displeasure heard loud and clear. (Source)
Undoubtedly, the Chinese and other countries have recently discovered that Italy and Greece, with smaller debt to income ratios than the United States, are less riskier and carry a higher rate of return. This is because, unlike the US, the Rothschild/Rockefeller bond rating agencies have trashed their country’s debt ratings, forcing them to pay a much higher interest rate than U.S. Treasuries. Hey, if you take the risk, you might as well earn the reward!