Rating Agency Pet Peeve

DowngradeWhile I’m on the topic of ratings agencies, I need to get this off my chest.  I hate it when I read from the Financial Infotainment Industrial Complex that “X markets moved today in response to a ratings downgrade of Y.”

Here’s a hint for anyone who follows financial news but who has never worked in the industry: Markets never move in response to a rating agency change.

Never.

Ever.

Markets move in anticipation of news, months or weeks ahead of a change in credit quality.  Often the ratings agencies observe a market move which prompts a query on their part, and possibly the rating agencies often have an inkling of the change in credit quality on their own.

But the ratings agency review process itself also takes days or weeks.  Which, in the continuous feedback loop of world markets, may itself prompt a market response.

Markets are forward-looking, anticipating credit quality changes, as well as ratings agency changes.  Markets never respond to credit ratings changes.

Want to spot a journalist who doesn’t know what he’s talking about?

Look at the one ascribing a market move to a rating agency change.

End rant.

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2 Replies to “Rating Agency Pet Peeve”

  1. Mike, This will be interesting to remember as I watch some of these financial networks. Some of your previous observations have helped me to better understand what I see and hear.

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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