Home > General, Markets > Making one head(s) spin: the US credit rating

Making one head(s) spin: the US credit rating

July 26, 2011

 

Rocky penned the following brain-teaser for the pages of an august publication — and wants to share it with his loyal readers…as it highlights an important market foible:

“I’m sure that we’ve both noticed  that whenever Moody’s or S&P release a bearish
press release about the sovereign AAA rating, the stock market gets whacked by
1+%, but the US bond market hardly moves (or even rallies). One can explain the
downward move in stocks by observing that “in times of uncertainty, people
reduce their risk and seek the safety of riskless investments.” But is this
rational? Here, the increased uncertainty is arising from the RISKLESS asset.
So, if the riskless asset is becoming more risky, must it follow that the risky
assets are proportionately more risky? That is, if you sell the risky asset
because you’re scared of the riskless asset, does it follow that you should buy
more of the riskless asset even though it’s becoming more risky, and that’s
what made you sell the risky asset to begin with?

[Disclosure: Rocky expects that if Congress  raises the debt limit without substantial spending cuts,  bond yields  will rise sharply….]

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  1. July 26, 2011 at 9:23 pm

    Fakename actually understood your logic, although it did give her a migraine. Perhaps she will run for President.

  2. tylerlangfrisco
    July 27, 2011 at 9:16 am

    No, maybe, and No.

  3. jeff watson
    July 29, 2011 at 2:43 pm

    Genius and I might steal that…with proper citations of course.

  4. ld
    August 10, 2011 at 8:51 pm

    All I can say is my head is spinning faster than the coin in the picture. Hope Rocky is sailing smoothly in these choppy seas.

  5. August 10, 2011 at 9:42 pm

    Hi LD:
    Good to hear from you! Rocky always sells too early. Buys too early. And goes to bed too early.

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