Equities Plunge, Bonds Hang Tough

Pundits proclaim the devastation on Wall Street is rooted in S&P's U.S. debt downgrade. If they are correct, why are equities down and bonds stable or slightly up? Sounds a tad counter-intuitive to me.

A lot of cash was either stockpiled or invested in equities over the past several months as uncertainty grew over whether the U.S. would default on its debt or raise the debt ceiling. Now, a dim economic outlook and the raising of the debt ceiling is luring investors back into the seriously over-bought bond and gold markets. The European situation  - developing fiscal crises in Spain, Portugal and Italy threatening to pile on top of the colossal problems of Greece and Ireland - almost guarantees U.S. bonds will hold steady or rise (higher prices = lower interest rates).

In the meantime, Bank of New York Mellon has decided to charge customers holding what it determines is "excessive" cash in their accounts. Yeah a lot of big players put cash on the sidelines in the build-up to August 2 as a defense against market volatility. I thought banks were supposed to pay depositors for the money they placed in the banks custody. But if banks don't lend that money, some penalties kick in from the Federal Reserve that cost those banks money. BNY Mellon would prefer to pass that cost onto their larger customers rather than actually lend it to serious borrowers. So... holding cash reserves cost money (in addition to the erosion of inflation), incentivizing well-heeled depositors to put their money somewhere. Their choice appears to be bonds or gold.

For myself, I am NOT buying equities yet. I don't want to catch a falling knife. I am staying alert to opportunities - good companies with solid earnings expectations and stable dividends. (At current prices I consider bonds carry a hefty risk of capital erosion.) If only a noisy part of my brain did not suspect the entire scenario is manipulated by the market's big players.

If it really is Armageddon, all the geese are cooked. If not, like Warren Buffett, I will carefully look for buying opportunities and reexamine asset allocations. On the other hand, I am NOT selling any gold jewelry I might have acquired over the past unnamed number of years.