The Greatest Contrary Indicator Ever

 | Jun 10, 2013 | 5:00 PM EDT  | Comments
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mco

Standard & Poor's lifted its credit outlook for the U.S. Whoopee!

Why anyone listens to this sham of a company, I'll never understand. Standard & Poor's, a unit of McGraw Hill Financial (MHFI), is one of a triumvirate of agencies that have been legally granted the authority by the U.S. government to dole out corporate and government credit ratings. Moody's (MCO) and Fitch are the other two. The ratings by these agencies have been nothing short of comical: downgrades of nations where credit is not an issue, like the U.S. and Japan, and "AAA" ratings passed around like confetti at the peak of the housing bubble. Many of those instruments, of course, went into default.

(S&P, by the way, recently said that it sees big benefits in Latvia joining the eurozone. Benefits? The whole world can see that the euro made a basket case out of Europe. A third or half the population in some countries is out of work, the economies are basically in depression and riots are breaking out everywhere -- yet, S&P sees benefits. This is nothing short of stunning.)

If we go back look at what happened when S&P cut its credit rating on the U.S., the results are shocking. In August 2011, the ratings agency dropped the rating to "AA+" from "AAA." The rationale? The debt was reaching a level that was "unsustainable." Never mind the fact that as a currency issuer, the U.S. can never have an inability to pay in its own currency. That game-changing fact didn't concern S&P.

What happened? Did interest rates spike and Treasuries tank? That's what you would expect if the risk of holding U.S. debt had risen suddenly. On the contrary, rates had plummeted. The yield on the 10-year Treasury was around 3% at the time. After the downgrade, yields dropped to as low as 1.43% and they currently stand around 2%.

Not only that, but the debt rose. Total federal debt went to $16.7 trillion from $14.7 trillion, and rates are still very low. But what about the U.S. dollar? After all, if the dollar went down, then S&P could at least declare something of a victory. Nope, the dollar went up, too. The U.S. Dollar Index (DXY) went to 82 from 75.

So how does S&P remain in business? Any trader or analyst whose job depended on generating profits based on his or her calls would be out of that job by now. Yet, S&P continues plying its wares, the media picks them up and we see S&P analysts speak at conferences, being accorded all kinds of respect as if nothing happened. It's like the Mafia. It also speaks to the total lack of credibility and relevance in so much of the financial sector these days: austerity, the Reinhart and Rogoff report, Foreclosure-gate, wrist slaps for admitted fraudsters -- the list goes on and on.

So many of these firms are literally destructive to the economy; they hurt people, yet no one is held accountable. And what happens to the good guys? They're driven out or marginalized because they can't compete with those who cheat or commit fraud. It's Gresham's Law. It really is like the Mafia.

But there may be something positive in all this: S&P is so bad, it might actually be good. I mean that from a trader's perspective. That's right, Standard & Poor's might be the world's best contrarian indicator. If they're bullish, you go bear. If they turn negative, you buy hand over fist.

Having said that, S&P's newly favorable view of the U.S.'s credit outlook may be the sell signal bond bears have long been waiting for.

 

Correction: This article had previouly stated S&P's U.S. credit rating downgrade and date incorrectly. It has been revised to show the downgrade was to "AA+" not "AA-". We apologize for the error.

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