Thursday, July 28, 2011

Tired of the Fear-Mongering on BOTH sides in the Debt talk and what a downgrade in the US credit rating MIGHT mean? Come join me in the center for an alternative view. I actually use some history. Novel concept...

This first graph shows previous situations where a nations bond rating (developed/rich countries) has been lowered (see the notes at the bottom of the graph) and the effect on interest rate the nation must pay to borrow money. It shows the period before and after downgrade.

The vertical bar in the middle represents "D-Day" for debt downgrade. On the left are days prior and on the right days after. The vertical axis measures "bp" or "basis points". A basis point represents a 1/100 of 1 or .01 and it refers to interest rates. For example, 1% interest rate is 100 basis points, 2% is 100 bp, and so on.  If the interest rate increases to 1.50% we say the interest rate increased by 50 basis points.  The horizontal line represents a composite average of all the nations bond interest rates.  Any basis point above or below the line represents a change from that average.  What do you notice about the 11 days prior and 11 days after downgrade? The 19 days before and 19 days after? 
Source: Stonestreetadvisors
Look at the perfomance of the US 10 Year Treasury Note (the benchmark for all the discussion) since 1990 in the graph below (I generated this from the US Treasury Website). Just eyeballing it, I would have to say we are WAY below average rates historically on the 10 Year Note. In other words, if we made a graph for the US like the one above, to the left of the Day 0, we would be significantly below average in basis points. The Federal govt has been able to borrow money at VERY low interest rates for some time now.

Source: US Treasury
Here is the perfomance of the US 10 Year Treaury Note in the LAST MONTH (June 27-July 27):

Sourced: US Treasury
Does this look like a bond market anticipating turmoil? In the first graph, you can see there was some trepidation in advance of downgrade but it quickly resolved itself. 

Not to suggest nothing will happen on our D-Day, but I have watched politicians and the media the last few days with frustration. I feel like they have us caught in Socrates Cave and we are just watching the shadows on the wall.  I REALLY want to turn around and see the light!!
"""A prisoner is freed from his bonds, and is forced to look at the fire and at the statues themselves. After an initial period of pain and confusion because of direct exposure of his eyes to the light of the fire, the prisoner realizes that what he sees now are things more real than the shadows he has always taken to be reality. He grasps how the fire and the statues together cause the shadows, which are copies of these more real things. He accepts the statues and fire as the most real things in the world. This stage in the cave represents belief. He has made contact with real things—the statues—but he is not aware that there are things of greater reality—a world beyond his cave."" Sparknotes
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