Another night of political finger pointing, scare tactics and fear mongering has the markets indifferent again. What is clear for a while and confirmed yesterday, this is not about economics, its all about politics and as I said yesterday, unless our ponzi scheme entitlement programs are altered in a significant way, the budget details are red herrings. The new dynamic though is what the rating agencies will do in response to any deal and while they have put the fear of god in some, I believe the downgrade bar is extremely high and they won’t follow bark with bite just yet because of the ripple effects and danger that will result. The irony of course is that raising the debt ceiling, aka taking on more debt, should be the catalyst for a downgrade, not vice versa. With this said, the threat of one at least has politicians willing to face reality. There may be no better indicator of what the market thinks than the Treasury auctions this week of 2’s, 5’s and 7’s. The $ index is falling to a 7 week low as the world looks at us in disbelief. In Asia, India raised rates by 50 bps, 25 bps more than expected and the Sensex index fell 1.9% in response as the RBI is still willing to sacrifice short term growth for long term price stability. In Europe, Spain sold short term bills at yields well above a month ago but their bonds are bouncing after yesterday’s selloff.
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