Treasury bonds getting crushed, gold flying, dollar falling
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).