Monday, September 5, 2011

"Things Look So Bad They Can Only Get Better"

To judge by the level of Treasury yields, the outlook for the U.S. economy has never been so bad. At 0.2% and 0.9%, respectively, 2- and 5-yr Treasury yields are lower today than they have been at any time during my lifetime. Far lower. Lower even than they were at the end of 2008, when the market was priced to years of deflation, a global depression, the default of as many as half the companies in the country within the next 5 years, and a global financial collapse. Wow.

The only thing that makes sense of these extremely gloom-and-doom yields that we are witnessing today is that the market is pricing in a massive default of European sovereign debt that in turn would result in the collapse of the Eurozone banking industry, and such an implosion might bring down the entire global economy. In other words, we have a market that is essentially priced to an end-of-the-world-as-we-know-it scenario.

In order to reach this grimmest of all possible scenarios, the market is making the dangerous assumption that all the bad things going on are going to get much worse: that Obama and the Democrats are never going to triangulate to a real pro-jobs program, that the Fed is going to print us into oblivion, that the economy is headed straight down, that the PIIGS are never going to veer from their big-spending, big-borrowing path, and that Europe is going to eventually implode. more