Mike: A lot has changed, and not for the positive, except for high quality bonds. The SE Asian economies, supposed to be the great growth engine (Let's see now...How many people live in China? What if each family bought a Pentium II computer....), are now forced to cut their spending, especially on US capital goods. Due to the devaluations, their products will now be a lot cheaper and pressure some US manufacturers for market share. This will set off protectionist sentiment here. This is the same magic combination of ingredients (recessions, competitive devaluations, protectionism) that helped get the 1930's depression under way. Even without that dire result, none of these events are good for US profits and stock prices. This sell off is quite rational.
To me, the rally in US treasuries is only partly a flight to quality. It also represents an awareness that the US economy, showing little inflation even in good times, could easily slip into deflation should we head into a recession. The last deflation here, in the 1930's, saw T-bonds under 1%, similar to the type of rates being paid by the Japanese today. Rates still have a huge way to fall, I believe. |
