It’s a massacre for U.S. assets today, with the Treasury Bond market getting crushed … gold flying … and the U.S. dollar tanking. Specifically, as I write, the long bond futures are off 2 13/32 in price. The yield on the 10-year Treasury Note is surging by 17 basis points to 3.36%. Spot gold is trading up by $16 to $955, while the Dollar Index is down 78 basis points to 80.38.
What is going on? Several things …
* We’ve been hearing a lot of talk lately about the possibility that countries with large piles of reserves (think China) would start dumping Treasury bonds and shift into other reserve assets, like gold. The New York Times noted today that China isn’t abandoning U.S. debt just yet. But it is getting “more choosy” about the maturities (buying short- rather than long-dated Treasuries) and types of debt (buying Treasuries instead of “agency” bonds) it’s willing to buy. I was very worried about a large downward move in Treasury prices as far back as December, and now that move is unfolding before our eyes.
* Standard & Poor’s cut its outlook on the U.K.’s sovereign debt rating to “negative” from “stable.” That means the country’s AAA rating is at risk. Britain is drowning in debt due to falling tax revenue and surging spending on bailouts and other measures. Its deficit is on track to hit 12.4% of GDP this fiscal year.
Hmm. Can you think of another country that sounds a lot like the U.K.? I sure can. In fact, I wrote about the similarities between the U.S. and U.K. back in March — and warned that we were going to run into the same kind of problems as them. Now, it’s happening.
* Finally, the government continues to bail out anyone and everyone, with no real regard for the cost of these bailouts. We just learned today that GMAC is going to get another $7.5 billion, and we learned yesterday that the PBGC may need its own bailout.
As a result, we are digging a deeper and deeper budgetary hole, one that we have to fill by selling monstrous amounts of U.S. debt. Investors are starting to rebel, just as we said they might in our white paper “Dangerous Unintended Consequences” back in March (see pages 40-42 of the linked PDF, if you like).
{ 2 comments… read them below or add one }
Dear Mike, I would like to thank you for the wonderful job you are doing! We all are aware of the “green shoots” and are all being told that the worst is behind us. In the beginning of March the world was ending. Now in May all is well according to the powers that be. If this is so, why are more people than ever still purchasing gold and silver for safty? I know for fact that many wealthy people are putting large amounts of bullion and rare coins into their portfolios. Also, average folks are buying gold like there is no tomorrow. It is as if collectively and intuitively the populace knows that they must protect themselves. The same phenonenom occurred in Weimer Germany before the hyperinflation cast ruin apon it’s citizens. Could it be that the collective wisdom of the masses is right once again?
I just finished reading the report, “Dangerous Unintended Consequences,” sections of which read like a 1-2-3 scripted “How to Fit It” manual for dealing with the recent (and current) financial mess. I thought things were bad – but what I read today in black and white shocks me. I’m in awe that the recognition by the GAO of an impending crises was ignored. But I am also blown away that 95% – 100% of the report’s highlights of flawed assumptions, and recommendations to repair the system, appear, at least to me at this public level, to have been totally and inexplicably disregarded. I suppose that’s what we pay taxes for – to have our representatives ignore the best advice. Sadly, a lot of very sick and disabled people will be affected as a consequence. I don’t feel sorry for many others, though. They’ve had their pie, and already eaten it. Thanks for the information…