Scariest Good Numbers on Earth Today

Major World Equity Markets on May 30th, 2012 (Source: Financial Times)

By any stretch of the imagination, yesterday was a bad day on the world equity markets.

The DOW closed down 147 points. That is a -1.3% drop. Germany’s DAX market was down -1.81%, London’s FTSE 100 was -1.74% down and Hong Kong’s Hang Seng stock market was down about -2% for the day.

Here are the scariest good numbers existing in the world for May 31st, 2012: 1.63%, 1.64% and 1.26%.

Those are the incredibly low benchmark yields for 10-year bonds on United States, United Kingdom and German government bonds. Investors are flocking to them in droves.

From its high earlier this year the DOW is down -6.2%, or about 900 points. That is bear market territory.

Why? Its because of worries over Europe’s sovereign debt/banking crisis that continues to worsen.

Is it Greece? No! This time it’s worries over Spain and Italy… the eurozone’s 3rd and 4th largest economies. World equity markets are responding to that.

World recession hangs in the balance.

How can super great numbers be scary?

The low yields for 10-year government bonds for the United States, the United Kingdom and Germany are a godsend to those countries.

It means they can borrow money to pay their own debts or finance job creation and/or economy boosting activities at ridiculously low interest rates. That is what makes them super great numbers!

According to the Financial Times, U.S. 10-year bonds are at their lowest rate since 1946, right after World War II. That is almost 0.1% lower than online records have been kept starting in January of 1990.

The United Kingdom’s 10-year bonds are at their lowest since borrowing cost records have been kept starting back in 1703!!

The scary part is that the United Kingdom is already in recession and the United States with its sluggish economy and ginormous $15.7 trillion national debt is an economic basketcase itself. The U.S. and United Kingdom bonds should be at much higher yields, but they are not!

Why? Because the eurozone debt crisis is so critical that large investors are trying to preserve what money they have left any way they can. They seek safe havens to store their cash until the world economy recovers. United States, United Kingdom and German government bonds (and a few other places) are their hopes of last resort.

The United States blows an opportunity

The United States government is absolutely wasting an opportunity to boost its own economy through the sale of U.S. Treasury securities at historically low rates.

Instead, the U.S. is dribbling away that opportunity by using the low yields to pay around $3.5 billion/day for unfunded day-to-day expenses!

That is just… welll… dumb!

If U.S. Treasury Secretary Tim Geithner had any brains at all he would be leveraging that advantage to reduce overall U.S. debt servicing… if he had any brains.

Forget about Facebook losses flirting with $28/share… that’s a drop in the equity market and U.S. debt servicing buckets.

Spain and Italy

World equity markets right now, and long term, will respond to the eurozone debt crisis for as long as it persists. Greece has made headlines, but it is only a small economic player in the crisis. Greece is symbolic more so than real.

Being the 3rd and 4th largest economies in the eurozone, Italy and Spain are real threats. Unlike Greece, they cannot be bailed out willy nilly by the EU without serious consequence.

That is the problem. Spain and Italy for the euro and eurozone are like U.S. banks were “to big to fail” back in 2008. Those banks were bailed out by the U.S. TARP program. Europe doesn’t have a TARP program big enough to bail out both Spain and Italy… yet.

Spain’s main problem right now is the bailout of Bankia. It wants to do it with sovereign debt bonds. That plan was rejected by the ECB that has to back it. Italy’s problem is its 8.9% of GDP government deficit spending. The EU requires, by law, that it be reduced to 3%. The EU is considering delaying that requirement through 2014.

Conclusions

It was a very bad day in world equity stock markets yesterday. The markets will recover, perhaps even today, but the cancer causing agent generating its fall – the eurozone financial crisis – remains.

It is so bad investors are putting their money into bad economies like the United States and England.

England and many eurozone countries are already in recession and conditions are worsening. Until conditions are fixed and eurozone economies prosper again the threat of world recession remains very real.

Even the re-election of President Obama in the United States this year depends largely on economic conditions in Europe over which he has no control.

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About azleader

Learning to see life more clearly... one image at a time!

Posted on May 31, 2012, in austerity, bailouts, Business, culture, Debt, economics, eurozone, news, Opinion, Politics. Bookmark the permalink. 9 Comments.

  1. I have to think about this. I’ll be back later to comment.

  2. A. Herkenhoff

    You wrote: ” large investors are trying to preserve what money they have left any way they can. They seek safe havens to store their cash until the world economy recovers. ”

    Not being very knowledgeable about bonds, I have to ask (forgive me if I sound uninformed): what happens when the economy does recover and investors no longer was to “store” their money in US bonds and they want their money back to invest in higher return investments. What if they all try to cash in at about the same time? Is this possible? If it is is it a potential risk for our economy?

    • Bonds are negotiable securities. They can be sold anytime… you just won’t make the full 1.59% (another new record low yesterday) they otherwise would bring.

      That is what makes bonds appealing as safe havens from other more volatile investments… which right now is just about everywhere else.

      Heck, there is even talk that some government bonds may even sell for NEGATIVE yields… meaning that investors will pay some governments to hold onto their money for them. German 2-year bonds are already being sold a 0% yields!

      When the world economy strengthens then investors will divest their bonds and return to stocks and other more lucrative investments. The low current yields make bonds less attractive to keep to maturity.

      That will make U.S. bond yields go higher again and increase the cost for the United States to service its massive national debt.

      Low yields can’t last forever. By the time the U.S. government tries to take advantage of them it will be to late and we will be worse off than we are today.

  3. Great Blog!

    When ten year interest rates are below the rate of inflation, you have financial repression. That these are the lowest rates in 300 years in the UK tells you we are living in age that has never been experienced. Living standards are going to drop for everyone, but the economies will one day wake up just due to pent up demand as all our stuff wears out, but it will be a slow process, maybe 5 to 10 years. When it does though interest rates will have to rise, causing another big recession, a bond market and stock market drop too. That is baking in the oven right now. We just do not when this cup cake will be done. These low rates will prevail for some time. That the US UK and Germany are seen as the safe havens is good for us living in these countries despite our own ugliness. But everyone will be suffering big time. You have to go back 500+ years to find such debt turmoil in all the countries causing this financial repression. Guess how these things were ended? The Pope declared a Jubilee. All debts were foregiven by Order of the Pope under God’s command. Creditors and Savers were wiped out, debtors were freed, but the slate was clean; and things got moving again. Nowadays instead of the Pope, we use Central Banks and their electronic printing presses, creating billions of dollars or Euros as needed. Of course when and if the economies do pick up, inflation could show up, and the Central Banks will have to unwind their printing. We are going to have a hot time socially and economically in the world for some years. Hang on. Stay out of debt. And protect your principal to the extent you can.

    • Wow, today US ten year yields hit 1.5% and 30 year bonds 2.57%. We are in an uncharted part of the universe.

    • We are not facing economic apocalypse yet, but we are facing world recession. If that happens it will have a long term effect on the U.S. economy because our debt is so huge to begin with and we are not doing anything to fix it.

      It is possible the rest of the world could recover and that, in and of itself, could send the United States into its own economic tailspin because investors will divest their U.S. bonds.

      The U.S. will not be doomed as long as the dollar remains the currency of world trade. Should that change – and it won’t for a long time – the U.S. reign as a superpower will be at its end.

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