Time to be cautious

Recall Moody last month warned of lowering the U.S. credit rating from Aaa.  If that happens, everything changes in the money world.  No picture today, doing real stuff.

An excerpt from Eric and David Coffin, Kitco.com:

...Cause for concern is the extent to which rates are rising due to the oversupply of debt. This may also have been part of the problem last month.  Bond traders have been getting worried about declining bid-to-cover ratios for several weeks. There is also evidence that foreign central banks, particularly Asian ones, have been backing away from the market.

It’s next to impossible to confirm this directly. The US Treasury has redefined the different classifications of bidder in the bond market. Only the terminally naïve believe this is anything other than completely intentional. We’ll have to wait for flow of funds statistics to divine things.  

[NB:  the government has been changing definitions for a year now so things don't look so bad. This is criminal in my view, the sort of stuff that puts accountants in jail. In the article quoted, the Coffins mention the loss of jobs in the last report (forget the lies, there was a big drop in non-government jobs) will take seven years to recoup!]

We doubt it’s a coincidence that light bidding in bonds coincided with US politicians and a couple of Nobel economists taking Beijing to task over the Dollar/Yuan exchange rate. There has been talk of forcing the issue by imposing across the board tariffs on Chinese imports.  

This would be a move we could only view as profoundly stupid. There is no good reason to think that would do anything but raise US prices. Consumers would either look for cheaper goods from elsewhere (elsewhere not including the US itself), or simply have to pay higher prices.   

We’re not saying we think China is right to hold down its currency.  It’s time for China to let the Yuan rise for everyone’s sake; Chinese consumers as well as US exporters. However, trying to carry a big stick to threaten the people you are simultaneously borrowing money from is simply ridiculous. A number of commentators have pulled out the “when you owe the bank a billion they are in trouble” line. Try taking the bids from China and a couple of other creditor nations out of the Treasury market and see what happens to yields. Yes, Beijing would lose money on its Treasuries, but the US would be driven into a new recession as rates exploded. Creditors would win that round. They usually do.....

 When the trend is clear and there is a door across the room, everyone there, those pretending things were fine and those who thought they were, will run to the door. The trick is to be at the door or saying goodnight.