I'm not an expert so I probably shouldn't comment, but I will anyway. (Never stopped me before).
It seems to me that many foreigners (and nervous bulls in US as well) have been gobbling up treasuries like they are going out of style. In fact, I read about this thing called a yen carry trade, where people borrow the yen at ridiculously low interest rates, convert to dollars and buy US treasuries. Seems like free money when you are borrowing yen at 1/4%, then swapping it for dollars and getting a 5-6% yield. You get a bonus when the dollar rises. Only trouble is, so many people have done this, that there has to be a huge short position in the yen, and a lot of money in dollar denominated assets like stocks and bonds. What happens if confidence in the US begins to wane and the dollar begins to slide?
What if something goes wrong and people start pulling money out of the US? Perhaps it will be political instability with the President, perhaps there will be a global meltdown and foreigners will need to dump US stocks and treasuries to raise liquidity. Foreigners won't want to hold US stocks or bonds if the dollar sinks. Whatever the cause may be, when the psychology turns and people are scared to even put their money into US treasuries, there will be a massive exodus out of the US stock and bond markets. All these people that have been shorting gold or yen and taking the money to buy bonds will scramble to unwind their positions. They won't want to be short gold or long US assets. The margin calls will exacerbate the process. This unwinding will feed on itself and drive interest rates up, which will choke off the already troubled economy. Of course the Fed will try to step in and reverse the trend but it will be too late. The market has more power than the Fed in the end.
**This is just stuff I have read and am regurgitating, I am by no means an economist or qualified to really understand these complex economic issues.**
However, I do know that markets tend to turn after extended periods of excessive optimism. If there isn't an excessive amount of optimism in the US bond market, I don't what you would call it. Same for the US stock market. Far too much optimism. I also know that leverage plays a big part in panics and crashes. It played a part in 1929, and also in 1987. I think there is a large amount of leverage in the US markets today.
Of course it never hurts to be extremely overvalued as well, which the market clearly is. Don't any of you try to tell me otherwise. |
