This morning, the market tanked. Normally, the first thing I do in the morning is open CNN.com to see what the conventional wisdom is on the downgrade. In this case, both CNN and the AP are claiming that the sell-off is a reaction to S&P's downgrade. Now, who knows, maybe I'm missing something, but this seems like a remarkably... wrongheaded assessment. Really, wrongheaded is MUCH too weak a word, but I'm trying to figure out understatement, so bear with me.
If the US's creditworthiness was in question, any elementary schooler should be able to tell you how investors would react. They know that if Little Jimmy isn't going to give your red ball back if you lend it to him, you're not going to lend him your red ball anymore. So if investors didn't expect the US to pay back its debts (or to inflate them away), those investors would charge high premiums for that debt. Instead, Treasury yields... dropped. The yield on 10-year Treasuries fell from 2.56% to 2.44%. And CNN knows this as well as I do because that's where I got the information; it's buried at the bottom of their article about how worried investors are about the US's solvency. The whole thing is a painful comedy of errors.
So why did the market tank? Same reasons it usually tanks: economic fundamentals are pretty bad, and Europe is still in trouble...
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