Trader Talk

Why Traders Are Going Long, Pt. II

More on why many traders have gone long. A trader I have known for more than a decade — a man with 30 years trading experience — called me this afternoon to say he has gone long the market, a comment I heard several times this afternoon.

"This is a great example of democracy in action," he said, referring to the debt negotiations.

"Why are you so certain there's going to be a positive outcome?" I asked.

"There's already a positive outlook," he said. "Let's look at what we are NOT going to get...we know for sure we are NOT going to get another decade of excessive spending. That is OVER. That is a big positive."

"The second thing is, we are going to see an extension of the debt ceiling ."

"But how can you be so sure that any deficit cuts will be sufficient to avoid a credit rating downgrade?" I asked.

"That's my final point: I don't think we will avoid a credit rating downgrade. I don't want to see a lot of spending cuts right now...with an economy growing at 1 percent, I'm not sure the economy can handle that. But more importantly, I don't believe the U.S. deserves a AAA rating any more. So let's see the debt of the U.S. be put where it belongs — below AAA. And let's see what happens to the market."

And there, in a nutshell, is how many traders feel. The debt ceiling will be raised, there will be modest cuts but not enough to avoid a credit rating downgrade.

And if the "let's see what happens to the market" comment seems a little cavalier, well, it's an indication of how far we have come in this journey.

For more on sectors that would be affected by a debt rating downgrade, see my prior post.

And for the record: I am very concerned about knock-on effects from a ratings downgrade. Which effects? I don't know, it's the stuff I haven't thought about that concerns me.

I now this: after watching the short term paper market sputter and then shut down in 2008 — an action no one thought was even possible — I am a lot more cautious before I make cavalier comments like "So what if the U.S. gets downgraded?"

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