Into a new disaster so I run to you
I run to you baby
And when it all starts coming undone
Baby you’re the only one I run to
I run to you
Who do you run too? When the world is spinning a bit too fast, from one disaster to the next, where do you run? Family, friends, God, a trout stream, a bottle, reality TV; all serve as places to run for a bit of respite.
Financially (at least for the time being) the world still runs to the dollar and US Treasuries. This has been the case for longer than I've been alive, but will it always be the case?
In the last seven days the dollar has rallied 4% versus a basket of currencies, Treasuries are up about 1%, Junk bonds hit a record low yield of 6.68%, and muni-bonds surged 2.4% (big moves in the span of seven days). While the dollar rallied, risk assets fell; the S&P 500 is down 1.2%, emerging market stocks down 4%, gold down 3%, and silver down a whopping 16%.
As the fiscal/bank debt situation in Europe continues to degenerate (Greek 2 year bonds yield in excess of 25%), as China and India work to reign in inflation, as the Middle East continues to simmer at the boiling point, and as Japan's Fukushima reactor goes into official meltdown; nervous investors run to the warm embrace of the US Treasury.
Greek 2 year bond yields:
As the Euro-zone was scheduled to meet on the continued bailout of Greece, the head of the IMF (International Monetary Fund), Dominique Strauss-Kahn, ran into the "alleged" unwilling arms of his NYC maid. ( IMF chief Dominique Strauss-Kahn charged over sex attack on maid ... ) I'm sure it was all a big misunderstanding, Strauss-Kahn apologized to his third wife and four kids from the comfort of his NYC cell, while hiring Sean P. Diddy and Plaxico Burress's attorney Benjamin Brafman. The IMF is holding an emergency meeting on how to proceed, while Mr Strauss-Kahn is occupied, with his arrest and legal issues. What we do know for certain is that Greece's inevitable default will not wait for this seamy episode to run its course. The dollar will continue to strengthen versus the Euro.
I run from pain
I run from prejudice
I run from pessimists
But I run too late
I run from prejudice
I run from pessimists
But I run too late
Are we running too late? How long will the dollar be the worlds safe haven? You might recall that the US has a bit of a financial problem itself. It appears that we have reached our borrowing limit, unless Congress votes to approve another increase in the debt ceiling from its current $14.3 trillion level. Treasury Secretary Tim Geithner continues to warn of financial Armageddon, if the debt ceiling is not promptly raised. Should we listen to Geithner, Bernanke, and most of Wall Streets dire warnings to continue raising the debt ceiling without making any real changes to our budget deficit? In other words, should we continue doing what we've been doing for decades (raising the debt ceiling whenever we spend too much), and just hope for a better outcome? Well, some knowledgeable investors seem to think otherwise. Stanley Druckenmiller (the Steelers richest fan) seems to think otherwise. In this weeks must read interview ( The Weekend Interview with Stanley Druckenmiller: What If the U.S. ... ) Stan says that the real threat to the country is not a few missed interest payments on the governments debt, but a continuation on the current proliferate path of endless spending. In the future, he says, "People aren't going to wonder whether 20 years ago we delayed an interest payment for six days. They're going to wonder whether we got our house in order." When asked about the fear-mongering and dire forecasts of our Treasury Secretary, that the Treasury bond market will be impaired for 20 years, he scoffs, "Excuse me? Russia had a real default and two or three years later they had all-time low interest rates." Druckenmiller is so sure that a longer-term budget solution will be tied to any debt ceiling increase that he has actually purchased treasuries expecting them to rally, even if there is a temporary technical default.
It's a big gamble. Will Congress have the intestinal fortitude, to ignore Geithner and Bernanke, and allow the Treasury to technically default in order to finally fix our long-term deficits, or will they cave like every Congress before them? Druckenmiller is betting that they will come to their senses, but only under dire circumstances. Bill Gross (PIMCOS head, and a shorter of Treasuries) is taking the other side of that trade.
As for me, we are moving from bearish to neutral on US fixed income.
When lies become the truth
That’s when I run to you
Be careful out there, and keep the lights on,
Chris Wiles, CFA
412-260-7917
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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