He says

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 rate below 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.

I don’t know if this right. You have to consider the fact that Treasuries are still the baseline risk-free asset. Again, because Treasury risk is existential risk. And, things that are present everywhere are by that token present nowhere.

What the S&P downgrade is, is frightening. Its unnerving it makes people scared. Realizations about the economy could certainly be in their too but there is no reason to think that the downgrade doesn’t matter.

Imagine if we found out on Friday that buried deep within the human genetic code was a time bomb and that there was a very small but real probability that within the next ten years every human being on earth would simultaneously suffer a massive brain hemorrhage and die. Because of the nature of this disorder there is nothing we can do about it.

This would mean that the existential risk to humanity had risen. But, its risen in a way that we can’t really do anything about. You would expect in such a time for nervousness – not only about the time bomb but about what other people might do because of the time bomb – to get the better of investors. You would expect to see some sell off in stocks and of course Treasury prices rise.

If this story is correct then this period should fade as the uncertainty fades. When it become clear how everyone is going to react then we should see stock prices march a bit up. Of course, to balance the equilibrium there must be a small chance of a genuine world wide freak out or some massively catastrophic policy action out of Washington, but the odds are against it.

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