Anyone who’s been seriously securities pricing over the last several years has seen a series of bizarre pricing anomalies in securities as markets have gone from boom to bust- back and forth. Taken individually, any of these pricing anomalies as the market moves would be a challenge to Efficient Market Hypothesis (EMH) notion that the current price of a security reflects the most current analysis of information regarding that security. EMH proponents have a hard time explaining the internet bubble, or really any security that seems to defy rational explanation.
Still, people put stock in the pricing mechanism of the marketplace and see some wisdom in it. When gold was languishing in comparison to the US Dollar through the 1980s and 90s, the rational explanation was that people no longer felt it was a safe haven. Now, conspiracy minded Libertarians such as myself felt that there was a greater conspiracy at work on the part of the powers that be to get people to believe in the US Dollar as the ultimate safe haven rather than gold. There are certain strange coincidences, such as the decline of the spot price of gold in the wake of most major political news (such as the start of Desert Storm or 9/11) which would be occasions where you would thing it would go up.
Now I know most people find conspiracy theories rather hokey, but when you stop and think about this one it makes a lot of sense. The US Dollar is the financial underpinning of modern world. Of course, anyone who knows history knows that it can’t go on forever. At some point, some new system will come along and take it’s place. Put another way, history has shown that the long term value of every fiat money ever created is zero. Of course, the current powers that be have a very real vested interest in prolonging the lifespan of the current financial system as long as humanly possible. OF COURSE, they’re going to manipulate markets to try to bring these ends about. Given that it’s the stated policy of the Federal Reserve to manipulate the US Government Bond market to create the interest rate environment that the Fed Governors want, how naive to you have to be to think these same people wouldn’t be manipulating other securities like gold?
But I’m actually getting off track of what I wanted to talk about today, which is how US Treasury Bonds performed on the first day of trading after the S&P announced a downgrade for them. They staged a massive rally. Quite curious indeed?
Never in the history of the marketplace have I heard of a massive rally in demand take place in terms of a product or service when a legitimate organization announced their concerns about that particular product or service, but that’s exactly what happened today. Of course, markets don’t give a reason as to their price movements, so the rest of us are left to guess.
The way I see it, one of two things happened. One explanation would be that people were so spooked by the S&P downgrading US Treasuries that they immediately put their money into the very investment that was, in fact, being downgraded. The second would be the that Federal Reserve, an organization which already has a mandate to purchase US Treasury bonds, stepped into the breech and started snapping up all the Treasuries they could get their hands on in order to convince people they were still a good investment. It’s probably some third story that I’m unaware of, but, between the two, I know which one I’m putting my money on.
