How To Tell A Market Commentator Doesn’t Understand Markets or Finance or What They’re Talking About

It’s Monday, Aug 9.  The stock markets are declining significantly, although anybody who says it’s panic doesn’t remember 2008.  Anyway, lots of market commentators, you know the types on cable TV news networks, are all claiming the decline is due to the S&P downgrade.  They’re wrong. Completely wrong as I pointed out already. But just to reinforce my point, here’s Paul Krugman just minutes ago:

Carnage in stock markets as I write — and all of the headlines I see attribute it to S&P’s downgrade.

They really are trying to make my head explode, aren’t they?

Once again: S&P declared that US debt is no longer a safe investment; yet investors are piling into US debt, not out of it, driving the 10-year interest ratebelow 2.4%. This amounts to a massive market rejection of S&P’s concerns.

The “signature” of debt concerns should be stock and bond prices both falling; what we actually see is those prices moving in opposite directions. And that’s normally the signature of concerns about a weak economy and deflation risk (see Japan, decline of).

What triggered economy fears? To some extent I think this is a Wile E. Coyote moment, with investors suddenly noticing just how weak the fundamentals are. Also, the mess in Europe.

And maybe, maybe there is an S&P story — but not the one you think. Arguably, that downgrade will bully policy makers into even more deflationary, contractionary policies than they would have undertaken otherwise, which has the perverse effect of making US debt more attractive, since the alternatives are worse.

But all the Very Serious People, having totally misdiagnosed our problems so far, will probably double down on that wrong diagnosis as markets fall.

Oh by the way.  The 10 year bond rate is now down to 2.38% from 2.6% on Friday.  The  3 month and 6 month rates are less than 0.01% – essentially zero interest rate.