Felix Salmon (The Fed Gives Up on Tightening) starts with the critical point: Long bond yields are heading to unprecedented lows, reflecting the paucity of economic growth and inflation, but also the higher systemic risks in these turbulent markets.
We are close (and threaten to breach) the record low in 2009 for the 10-year Treasury Yield, when the mantra was flight to safety, when even AAA non-bank corporates were regarded with deep suspicion and the world financial system seemed on the brink of collapse:
But the current shift downwards is more ominous, and indeed more mysterious.
Foreign investors must surely be assuming higher sovereign risk, with ever escalating public debt and significantly higher dollar vulnerability. Granted trade surplus countries are less worried about a profitable trade than recycling those surpluses to maintain their competitiveness, but how much of this move is the U.S. buying its own dirty laundry (i.e. quantitative easing)? And what would the 10-year yield be if the Fed hadnt purchased $2T worth of various government instruments over the last 3 years?
It could carry on, but...
But a swirling still-unarticulated unconscious (named Swami) says this will end very badly. And that Swami's voice lurking deep within has never erred (well... hardly ever).
So the dress party continues, carnival guises de riguer. Asia smiles sweetly in her kimono and pumps more money at Treasurys. The Fed bows graciously (and perhaps more reverently each time!), accepts the loot, and dances a flamboyant rap-groove-twirl, to remind the upstarts who is actually le beau de la balle! Dammit!
But back at the ranch (U.S.), there are louder voices screaming their anguish at the lack of jobs. "I can live with negative equity, but hell, its been 12 months without a paycheck! And no! I wont flip hamburgers - I have a diploma in Film Studies!"
The ranch politicians are frantic. Their soothing rhetoric (expressed from under large Texan hats, so lip movements are concealed) that used to allay the crowds now fall on deaf ears; jaded by unfulfilled promises, unrejuvenated wardrobes and smaller hamburgers, the masses unite in protest. The politicians try - hard - to reconcile their role as the global leader of free market capitalism, and the fact they get pelted everytime they go to Wal-Mart. Eventually... Eventually they choose: Anything but another ripe tomato hurled by an unemployed angry citizen at Walmart!
The protectionist barriers rise faster than HP's Hurd on helium... Within weeks Fortress U.S. is sealed. There was no other choice, you see. We've been beaten at our own game, the game where we made the rules. We either accept that, and we can't, or we have to change the rules. That's when the global symbiotic relationship that has prevailed of recent begins to unravel. And fast.
And where that takes us, the Swami hasnt told me yet. I don't think even he knows. But he did say, "Watch the dollar. In this world of complex symbiosis, things are not always what they seem."
Disclosure: Long WDC. Short HOT CRM, the dollar.