Harry Dent does a pretty good job in ‘splaining today’s risk sell-off, in our opinion.
We’re beginning to sense, however, the markets are awakening to the fact the U.S. government is going to have a funding problem. As the world contemplates a fading FED bid for U.S. government debt, who, may we ask, will step up to buy Treasuries and fund the U.S. budget deficit at such repressed and negative real interest rates?
Foreign capital flows? China and Japan’s current account surplus’ are shrinking.
Petrodollars? Possibly, but oil has to remain elevated, which is risk negative.
Flight to quality? Could be, but doesn’t that require a negative story for risk assets?
Interestingly the 10-year bond rate moved only 4 bps lower with such a relatively large equity sell-off. Some traders conclude this is a good sign for Mr. Risk. Maybe, but keep our alternative scenario on the radar. Higher or stubborn interest rates and lower equity prices will be the indicator species to confirm our worries.
The Treasury market needs to reprice to levels, which reflect and incorporate inflationary, credit, and FX risks, making it an attractive asset class to sane investors. The Congress and Administration better get busy in dealing with the country’s structural budget and debt issues or Mr. Market will force the issue.
This doesn’t mean balancing the budget overnight but, at the very least, starting to focus on the political untouchables, such as Medicare, public pensions, and the solvency of Social Security.
We leave you with these three thoughts: 1) Greece is not a one-off and is a symptom of wider global sovereign debt and fiscal crisis, which will manifest in other countries, even those with independent central banks; 2) “confidence is a very fragile thing“; and 3) “in economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.”
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