Flight to Treasurys has little to do with ‘Quality’
by Rick Ackerman
Posted August 19, 2011
THE NEWS MEDIA WILL EVENTUALLY FIGURE OUT THE TRUTH — that stocks got pulped yesterday simply because they are in a bear market. The Mother of All Bears, quite possibly. The Dow finished the day down 419 points after trading more than a hundred points lower than that intraday. The selloff was attributed to the usual suspects: “fears” over Europe’s shaky financial condition, and America’s apparent relapse into recession. Although both concerns have been with us in spades for more than a little while, they seem, suddenly, to have become overwhelming and unmanageable now that the world’s stock markets are imploding.
Of course, there will be equally spectacular rallies in the days, weeks and months ahead, and, as was the case during the 1930s, they will be interpreted as signaling a glimmer of hope for the economy. The press will do the interpreting, but most Americans will know better. The Great Recession has returned with a vengeance, and predictions of 2% GDP growth are about to be trimmed to sub-zero by the same morons who were so optimistic just a few weeks ago.
With Dow stocks down 500 points in the opening hour yesterday, Reuters and some other news sources initially theorized that “investors” – a euphemism these days for algorithm-driven machines — were despondent over a Philly Fed report that factory activity in the Middle Atlantic region had “unexpectedly” fallen to its lowest level since March 2009. Reuters tactfully refrained from identifying by name the experts who had been looking for better numbers, but they would have to have emerged from a sarcophagus to have been surprised by the bad news. Meanwhile, although the eggheads who compile economic statistics may be deaf, dumb and blind to the real world, Joe Sixpack, unemployed for the last 36 months and no longer looking for work, could tell them a thing or two about it – could tell them that there are no jobs: not for experienced workers who have been laid off; not for spouses desperate to create second household incomes; not for their sons and daughters who have recently graduated from college with worthless degrees and $100k of student loans to pay off.
A seeming anomaly in yesterday’s rout was the spectacular rally in Treasury paper that pushed yields on the 10-Year Note below 2% for the first time since the early 1960s. Not to be outdone, futures contracts for the 30-Year Bond rocketed toward a Hidden Pivot target of ours at 143 that we had expected would take months to reach. At the rate prices were climbing yesterday, however, the target could be hit before September.
So why were bond prices in a vertical parabola? Although we are usually scornful toward the flight-to-safety argument, there may be something to it this time, although not for any reason that the news media appear to have discerned so far.
Our take is that Big Money is growing increasingly panicky about the prospect of all-out war in the Middle East. Terrorists have begun to step up attacks on Israel in advance of a U.N. vote on statehood for the Palestinians. One might think the Palestinians would be on their best behavior. Instead, a squadron of jihadists attacked an Israeli passenger bus and some other vehicles near the Egyptian border yesterday with enough firepower to take on the IDF, at least for a short while.
The world hasn’t seemed this “interesting” since the summer of 1914. The prospect of war in the Mideast aside, there is one other reason money has been flowing into Treasurys: Where else (besides bullion) can one put it? It’s not as though the money managers regard Treasury Bonds, Notes and Bills as the ultimate safe haven, though. To the contrary, they can see just as easily as you and I that the U.S. is headed for financial disaster. Even so, Treasury debt still looks like a good bet to be the last major asset class to collapse. Perhaps. But by how many days?
[This article has been slightly shortened, apologies to Rick Ackerman.]