Tuesday, July 26, 2011

Debt Crisis: I'll Huff and I'll Puff

I hate to bring this up, but the minute-by-minute, mind numbing countdown to the debt ceiling expiration date reminds me of the Y2K commentary, printed in respected sources like the Wall Street Journal, telling of nuclear power plants melting down and planes falling from the sky as their internal calendars couldn't deal with the new millennium. As I recall, absolutely none of that folderol came to pass.

Let's say rating agencies downgrade after multiple warnings. Wouldn't the warnings, like those of the wolf, already be incorporated into prices? If the world were to suddenly divest itself of Treasuries, where would the funds go? There aren't enough German bonds, Swiss francs, or instruments-du-jour to go around. Letting the debt ceiling expire is not equivalent to the real possibility of any Treasury holders not being paid. Traders will make money. The average investor will get whip-sawed by her broker.

Tom Simons of Jefferies notes that the most recent 2 year Treasury Note auction was "well bid," and that "in a perverse sense, Treasuries have become a form of insurance against their own downgrade." Have a cup of tea?

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