Notes From Underground: Good Grief, a Chinese Rating Agency Downgrades U.S. Debt

Can a centrally directed economy spawn a neutral credit rating agency? Readers of NOTES have long been aware that I hold Chinese data releases in the lowest regard. My disdain is based on the inability of GOOGLE to operate freely in China and provide a forum for the “free” flow of ideas and critical thinking. There is no free and open society (Karl Popper). So I find it tragic that the markets paid attention to a downgrade of U.S. debt by the DAGONG  rating agency. It is bad enough that the U.S. rating agencies are tainted by the desire for profits and are paid by the sell side of the street. But a sense that a Chinese rating agency could be independent of state influence is enough to upgrade the U.S. arbiters of credit … to well, AAA.

The U.S. bond and equity markets brushed off the “downgrade” and rallied in a continued tribute to the U.S. government reopening and bringing some semblance  of stability to the political arena. It was a total risk-on day, with some cracks in the correlation paradigm. GOLD and other precious metals performed well, although the gold’s entire range could be found on a ONE-HOUR BAR CHART from 2:00-3:00 a.m. CST, which is London’s opening. It appears there was a huge buyer of both gold and silver early in the London session. (Interesting that no news reports about a large buyer in the same way that last Friday’s New York opening caused a closing of the CME’s gold contract for ten seconds.)

Gold Intraday Volume Chart

The fact that SILVER also had a sizable rally on the same timeline reflects that some large buyer was in the market, maybe covering shorts  because the GOLD and SILVER both failed to break following the positive news of the “debt resolution.” Gold’s recent lackluster performance during the budget battles gave investors a disposition to short GOLD on any resolution. The stock markets got the message about the resolution being a positive, but the market forgot to inform the precious metals about the “good news.” Tomorrow’s gold and silver trading will be an indicator if today’s sizable rally was mere short covering.


Adding to the negative outlook on GOLD was a weekend news story out of INDIA. The new Governor of the Bank of India, Raghuram Rajan, a man I respect, commented that India could cover its current account deficit with its large GOLD purchases and $280 billion in forex reserves. The market inferred that the Indian Government was going to dump GOLD to ease the burden of its foreign debt which is 22 percent of its GDP. Highly doubtful premise as India has continued to purchase large amounts of gold even as the INR (rupee) has declined so dramatically against the U.S.DOLLAR. Even as the Indian economy has struggled, the 20 percent decline in gold prices this year has kept India’s demand for the precious very robust. The only negative for Indian consumers was measures taken by the government to ration gold away from investors and direct it to jewelers. It seems the market was misguided in its speculation about Indian gold sales.

***Unemployment Friday has been moved to Tuesday, October 22. Now that the BLS is back open and working, the jobs data will be back at center stage. A robust number will bring back the discussion of a December tapering. At this point it will be silly season as some FED members will probably raise the issue of waiting to see how much damage the government shutdown did to the U.S. economy. Last week I offered a “modest proposal” that the U.S. data releases should take place on the weekend so as to remove the impact of the high frequency trading algos and the fear of inadvertent leaks by the selected providers of the release. (Two seconds in the world of HFT is a lifetime, just ask any of the trading rooms.) The WSJ ran a story October 10, “U.S. Rethinks How to Release Sensitive Economic Data,” in which it was revealed that deliberations are going on about this issue at the White House level.

As the article notes: “The system of lockups has come under fire in recent years after several media firms, including Dow Jones &Co., publisher of the WSJ, started using the lockup to sell raw data from the government reports to high-frequency trading firms. That data, sent along high-speed transmission lines, allows firms to make computerized trades before individual traders can react.” End the inherent advantage and possible corruption by releasing the data on the weekend. If the post office has weekend delivery, why not government information agencies?

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6 Responses to “Notes From Underground: Good Grief, a Chinese Rating Agency Downgrades U.S. Debt”

  1. Joe Says:

    ” The market inferred that the Indian Government was going to dump GOLD to ease the burden of its foreign debt which is 22 percent of its GDP.”

    Maybe India will be first to issue gold backed 30 year bonds?

  2. Brian S. Says:

    I find it very interesting that those who wish to bash China about lying,slowing,weakining,etc etc. Even if somehow they are overstating GDP at 7%, yet we believe the USA is in a recovery at 1% GDP. GS reports that because of the shutdown a 2% reduction in GDP is to be expected,proving that it’s mainly Gov’t spending. So who is lying,where is there freedom thinking when we have the likes of NSA,NDAA &THE PATRIOT ACT?

  3. yra Says:

    Brian–the bashing of Chinese data does not infer the U.S. is pristine.Just a matter of degrees—this is not an issue of what rolls out of the U.S. agencies,but at least Google and other forms of media operate “freely” and while we may be monitored the discussions are allowed to take place in spite of Lois Lerner.

  4. kevinwaspi Says:

    Regulators could end this nonsense of crap-shoot markets with three simple enforcements:
    1) Reg FD applies to all “systematically important” news releases,
    2) All messages (read “orders”) placed across trading systems need to be valid and intact for a minimum of 5 seconds. Let human eyes see again.
    3) No payment for order flow is allowed, market makers have to earn the business through what we used to call “best execution”.
    It will not happen though. Ike warned of the “militaryindustrial” complex. Your chastise of business leaders yesterday was spot-on about the “businesspolitical” complex that corrupts our world.

  5. yra Says:

    Professor–I would give you an A+ for that post—and I am not a grade inflationist

  6. Chicken Says:

    I agree with Yra’s insight. Seriously, did T’s sell off in advance of impending default? Oh really, I’m not swallowing that story.

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