The Next Contagion

Following the infection begins to spread throughout the world.

It was a surprise to Wall Street, not understood in Washington - and very dangerous.

This can thwart the plans of the U.S. Treasury, Federal Reserve, and many of their colleagues abroad.

This ...

The collapse of the Sovereign
Government bonds

This is not the first of the financial crises of recent memory:

Back in 1997 we witnessed the currency hatched infection in Thailand, quickly spread to the rest of Southeast Asia ... touch the Russia in the gut ... sink and a major player in the American market derivatives.

Then, after 10 years, the debt-infection were incubated in the sub-prime mortgage market in the U.S. ... rapid infection of almost all credit instruments ... Wall Street as a bright sledgehammer ... and mortally wounded the global financial system.

Contagion It was bad. Now, however, after the initial infection at a much higher level in the main financial instruments on earth - long bonds issued by sovereign governments.

Saga begins in Greece
Greece and Portugal.

Only 116 days ago, on 8 October, it was Greece Benchmark 10-year bonds sold for 112,295. Today collapsed at 92.13.

And the drama of raising yields more surprising - only 4.41 per cent to 7.14 per cent, a jump of more than 60 percent in less than four months.

By coincidence I was in Greece not long ago, a visit to the origins of Western democracy.

When the local soothsayer told me that the next global infection debt will, blocks from the Pantheon, I do not believe it. But it happened only in recent weeks.

Although the infection spreading to other countries ...

Portugal 10-year bonds reached a peak on Dec. 1, 2009, only 62 days ago. And now she is almost non-stop, with the largest decline recorded dive at the end of last week.

UK government bonds (gilts) are equally vulnerable.

Sovereign bonds in Spain, Japan and other countries also are beginning to get serious lack of interest.

Next Victim: VS Government bonds

In the global competition for investors, VS Treasuries, usually regarded as the "least ugly". Thus, global investors are usually willing to have a relatively high price to pay for them, reluctantly accepting lower yields.

This helps explain why U.S. bonds are not primarily for infection. But it does not protect them from becoming one of the following purposes.

Indeed ...

* The U.S. government suffers from the same or even worse, underlying disease, such as Greece, Portugal or any other victims of infection - massive, out of control federal deficit. America's red ink is 1.4 trillion dollars last year and the other 1.4 trillion dollars this year.

* Washington's head buried in the same mounds of sand, Athens and Lisbon - gross underestimation (a) the size of the deficit, (b) the potential impact on investor confidence, and (c) the level of bond prices may fall.

* Like his colleagues in Athens and Lisbon, President Obama ignore adviser, who warned of disaster and shortage is just beginning to seriously consider measures to reduce the deficit. And yet he continues to avoid steps which could be one significant difference.

Specific ...

President acts as the Commission for the Study of deficit reduction (rejected by the Senate last week) ... but the commission's recommendations are not binding there is no clear process in place for implementation.

The President has proposed to freeze some domestic spending, but will freeze affect only a small portion of the budget will not be hit until next year, and will be a combination of reductions and cost increases. It will have zero impact on the deficit in 2010 and a negligible impact on future deficits.

The president promised to TARP funds back to taxpayers, but also suggested the use of unspent funds on bank credits TARP community - another lost opportunity to reduce the deficit.

The President supports the "pay as you" rules for Congress - requires new spending to be weighed against budget cuts or revenue increases. But the devil is in the details. If these rules are not very sharp teeth, they are ineffective.

My opinion: if the deficit was only U.S. $ 200 billion, or 300 billion U.S. dollars, I would support and even applaud these small steps.

But in the context of the Back-to-back deficits and 1.4 trillion U.S. dollars in the inevitable collapse of the bonds are little more than too little too late master.

Result
This complacency
It is a catastrophe

Unfortunately, although the majority of advisers in the Obama team have become more aware of the growing political waves against Washington and rescue operations and deficits, they do not see the approaching tsunami comes from Greece.

Money and Markets Mike Larson explains the situation as follows:

"Imagine what would happen if Uncle Sam's borrowing costs had increased, when in Greece - 60 per cent!" Imagine what would mean that the cost of auto loans, mortgages and other products whose prices track Treasury yields! And determine the effect on the economy more trying to recover from the Greater recession, this is the next big story, which few people about. "

He is right, and he constantly warned about.

Alas, if Obama administration and Congress can both learn something from the budget or find a new fountain of revenue - as unlikely in the near future - is crumbling U.S. bond prices and bond sharp rise is inevitable.

As we saw during the propagation in 1997-98 and 2007-09 ...

* The credibility of the vulnerable investment - this time, long-term effect of the U.S. government - a sudden collapse. Then it was a certain geographic regions or niches. Now she is a threat to the foundation of our national essence.

* Investors will pull their money in a hurry ...

* Avalanche sales drive prices all bonds - government, businesses and municipalities - in an uncontrolled dive swan. And ...

* The infection spread to all countries on the planet is also clear that vulnerability to disease - has a massive federal deficit.

Nevertheless, a large silver lining in this new crisis: Sinking prices of government bonds - Updated additional borrowing the government - the most powerful mechanisms for governments to convince the market and put an end to their print spend madness.

Provided that we again did not succumb to false promises of politicians - and if we are willing as a nation, the necessary sacrifices - there is still hope for America.

This is one reason why I recommend that you not leave the safety of the securities Treasury. On the contrary, all together, I made clear the real problem is not with all the securities the Treasury. Strictly long-term Treasuries.

Another reason is that the short term, short term (within a few years in duration) is much, much less vulnerable than long-term variety.

VS treasury bills (always less than one year) suffer little or no reduction in prices, even in the midst of the collapse of the bond market.

So stick with them. Yes, I know. Their income is sadly low. But they still offer the best in the world of security and liquidity.

Make sure you avoid any long-term notes and bonds - whether issued by the Government. If the market price of bonds falls, it is your principal value. And for this reason that the losses in principle, any additional interest they pay you may be eliminated in the heart.

Good luck and God bless!