Relèvement du plafond de la dette US: Nos Journalistes singent les tabloïds Européens
US Debt-Ceiling bill: the failure of the media
By: La Septieme Wilaya
Most of the pundits, spin-doctors, and so-called journalists do not know anything about economics or finance, and the last debt negotiations in the United States is a classic study case of how the media in general and the so-called specialists in particular got it wrong. This characteristic of the media at blowing things out of proportions, or misreading simple stats or figures is not specific to US journalists and pundits, but to European media, and even to the Algerian as well. A perfect example of such total idiocy is Yazid Slimani’s article entitled “Réserves de change de l’Algérie placées aux Etats-Unis: Le danger est réel, selon les specialists” published in TSA (Tous Sur L’Algerie). Clearly, the journalist or the reporter had no idea what he was talking about. Mr. Slimani went as far as saying that America’s treasury bonds are not a safe financial investment for Algeria. This is the most idiotic statement i have ever heard, and i will explain why in the coming paragraphs. It was clear that Mr. Slimani as well as several journalists from El-Watan, El-moudjahid, El-Chourouk, and many others publications lacked serious knowledge about simple economic facts, and it was evident that Mr Slimani and all his colleagues in the Algerian press were just rewriting AP press releases and putting their own spin on them without real analysis.
So what did the chorus of idiots tell us? In an almost a gleeful way, most journalists told us that the American debt is a strong signal that America, at least economically, was done, toast, finito. They also told us that the likelihood that the two Chambers of Congress and the White House do not reach a deal was real, and therefore the likelihood of American defaulting on its financial obligations is more than likely. Moreover, they informed us that in the case of a default, interest rates would increase, the yield on treasury bonds would increase, and the dollar as a currency would be damaged for good. Well, this turned out to be very wrong, and the reactions of the bond and the currency markets told us so prior to the deal which was struck between the White House and Congress.
Before the deal was struck, and just prior to the financial Armageddon weekend (economic Armageddon and end-of-the-world for the bonds market as it was hyped by the media), I decided to check the reaction of one of the largest money manager funds, the Natixis Global Asset Management, a $700 billion firm. We have to remember that everyone in the media was telling us that the bond market would punish United States, and we would see an increase in the value of borrowed dollars by the US. The question is: How did the bond market react prior to the deal? And the answer is: a very normal and quiet reaction. The bond market actually rallied behind the United States, and this is prior to the so-called financial-Armageddon-weekend. Prior to last weekend, the price of the government benchmark 10 year-Treasury Bond (TB) was barely reacting. The yield on the 10-year TB was below 2.8% on Friday (that is, 2 days prior to the so-called Armageddon). In fact, during the whole negotiation between Congress and the White House and during this almost surrealistic two weeks, the yield of 10-year TB (interest cost to the US government to borrow money in other words) dropped significantly contrary to every prediction made by every talking-head. The whole narrative that the US was living beyond its means financially, and that countries and sovereign wealth funds would no longer lend money to the US—i.e., buy treasury bonds— was not a correct. It was total–and excuse my french–total b.s.
10-year Treasury Bond Yield from July 27th to August 2nd
The media’s narrative clearly influenced by market speculators disguised into financial and economic specialists argued for months that some kind of bond market vigilantes would punish the US for its deficit spending, and would either stop lending money—i.e., buying treasury bonds—or demand higher interest rates in order to lend to the US; that turns out to be total horse manure. All this narrative was completely removed from what was going on in the real currency or bond markets. What is even more striking is ever since S&P rating agency threatened to downgrade the US debt, interest rates have been almost systematically on the decrease. What that means is that countries and sovereign wealth funds were willing to lend the US money and get lower interest rates on their money, which basically allows the US to have a cheap money pool to borrow form. The reaction of the market was a slap in the face of the media. The markets didn’t believe all the media hype of US defaulting because they believed all along that a deal was going to be done between the White House and the Congress. And any rational human being with 2-functioning neurons would have arrived at the same conclusion.
So, why did the market(s) react differently than the pundits-predicted? And why did the media ignore what was actually truly happening in the bond and currency markets?
The explanation for why the market behaved the way it behaved is very simple and very rational. 2011 has been a very unstable year so far. This instability started in the Middle East during the Arab spring, and the result is that an entire region of the world is living a very unstable period. It is not because only Tunisia and Egypt underwent drastic political changes that the rest of the Middle East is unaffected economically and the politically. In the world of economics and finance, instability brings uncertainty in the future, and the combination of these two kills all medium and long-term prospective investments. Thus, you have revolutions in Egypt and Tunisia, and you add to that a civil war in Libya, turmoil in Syria and Yemen, ethnic uprising in Bahrain, political troubles simmering in Saudi Arabia and United Arab Emirates, and social and economic discontent in Algeria and Morocco. What you have here is a large region of the world with serious sovereign wealth funds—i.e., a large number of people stuck with large amounts of cash— looking for opportunities to invest. It is also a large region of the world where public investments have plummeted.
In addition to the turmoil in the Middle East, the European continent has been going through a major sovereign debt crisis. Not only the confidence in the euro-zone is very low, but also the possibility that either the euro as a currency is living its last decade or several countries (such as Greece) would be kicked out of the euro-zone is a real one. No investor in his right mind would buy European government bonds right now. The result is that Europe and the Middle East have become extremely unstable and risky places for investments. Only the US, even with a budget deficit problems, represents the most stable place for investment, which explains the low yield that we have observed in the last month or so. The US still represents the safest and most stable place in the world for investments because, at the end of the day, an investment or a security is only as good as the best alternative around. And right now, there are no real good alternatives in the world for good safe investment than in the the US government treasury bonds or US government debt. Moreover, we also observed that as profligate as the US federal government has been, investors continue to feel that US treasury bonds offered the best source of value for a long-term investment. Furthermore, we clearly witnessed the same thing on the currency markets. On Friday and Monday, the Dollar was rallying quite well. Only the Dollar, the Japanese Yen and the Swiss Franc were doing well on Monday, all other currencies were selling off. The confidence of the market in the US financial institutions is strong, and even this so-called debt crisis didn’t affect that confidence.
Long-term interest of some European countries: secondary market yields of government bonds with close to 10 years maturity
Putting all this together, we would logically expect that the US bond market would have a major rally on Monday (the day after the debt-ceiling deal), and it did. On Monday stocks were selling off, at the same time the US treasury bonds were rallying. What that means is that as the macroeconomic outlook gets more problematic (low GDP growth in the last quarter, stubborn unemployment rate, low federal domestic investment, real estate market still wobbly and so on), investors pull out of the stock market and move in on treasury bonds—i.e., we will see stronger demand for US treasury bonds. Consequently, this weak and wobbly economic recovery would most likely strengthen the US treasury bonds allowing the US to borrow cheap money.
So, why didn’t the media and the so-called specialists see that? The answer is simple as well. They were not interested in a rational, logic and calm explanation. They were interested in broadcasting and publishing gloom and doom. As the old saying goes, if it bleeds, it leads. Well, the media wanted blood, guts and gore 24 hours per day, and they hired so-called specialists to feed the hungry beasts more blood and more gore. The purpose of this was to attract more eyeballs to their websites and TV screens, and to sell more copies; and they did. The question is why did the Algerian press get caught up in this logic. The financial reward for our journalists is either low or nonexistent. Moreover, our press and media is heavily subsidized, and it survival does not depend on its sells numbers, but on the check the Algerian government writes. In other words, their exposure to bad economic and financial times is very low. I cannot explain why our newspapers and websites and even TV news were blubbering 24/7 about Algeria’s investments and Algeria’s exposure to a bankrupted US economy. What was even more intriguing is not one source (TV and newspapers alike) told us which money-management fund manages Algeria’s investments, or what is/was the return on those investments, or what country’s debt Algeria is holding the most, and so forth. Questions like these interest the Algerian people, not some kind of fictional Armageddon-like scenario. What was even sadder is to read analyses in the Algerian newspapers written by our journalists that were completely wrong. Journalists who could not make the difference between the Senate or the House of Representatives, or know what a treasury bonds is, or what a debt ceiling is, or why the US even vote to increase its borrowing capacity. It was sad to see our journalists trying to translate Reuters’ or AP press releases without even understanding what they meant. It was a sad sight to see our press monkeying European tabloids, though there are serious subjects of national and popular interests that our journalists could have written about.