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We had some very bad US data again today, but Treasuries weren’t been able to extend sharply to the upside, which leads us to believe that we might be near a major inflection point. While the Euro zone situation isn’t fully solved by any measure, we think their debt contagion has been moved to the back burner and that the slowing of the US economy and its soaring deficit problem might become the media’s new obsession. With the battle lines drawn in the recent G20 meeting, the US is already setting the stage for divergent policy decisions. Perhaps the US leadership was already aware of the vulnerable status of the US economy, but since Washington won’t do standard textbook stimulus efforts the US might be in for a return-to-recession status.
The world has already bid Treasuries into the stratosphere due to their flight to quality status and because of evidence of US slowing. But today the Treasury rally seemed to run out of gas, and the US Dollar appears to have finally caved in. This suggests to us that world sentiment is changing and that further slowing in the US could mean a flight from the US Dollar and from US Treasuries. While gold was down sharply today, the world might have little choice but going to gold because of the almost total absence of a sturdy currency.
It would appear that the US will now be forced to provide more quantitative easing or perhaps even another stimulus package. Since the current US Administration would rather shoot itself in the foot than to utilize standard economic principles in their easing programs, it is possible that US Treasuries and the US Dollar are poised to go from the “penthouse” to the “outhouse.” In our opinion the Democrats won’t/can’t change their principles of only helping those who don’t have a job, are not wealthy and don’t work on Wall Street. This means the Democrats are going to be faced with market action ahead that could insure a house cleaning in the November elections.
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