The Road to Default: Whaa???

July 29, 2011

(This article was first published on The Dancing Economist, and kindly contributed to R-bloggers)

Okay so here is what has been happening:
The yield curve has been going through a mad flattening- indicating that investors are “flying to safety” and that a recession may be looming around the corner. Why has it been flattening? Well, a string of bad news. For one, GDP numbers came out today and only indicated a 1.3% expansion. Considering the revisions in these numbers have been downward of late- this is not good news.  GDP has been expanding but at a slowing rate signaling a possible peak around the corner.

Furthermore, Congress still has yet to come to an agreement with Tea Party-ers being the party poopers by acting completely unwilling to budge with Obama and now John Boehner.  The situation does not look pretty. In fact, its unbearable to witness.

Additionally, consumer sentiment readings came out today at 63.7 which is consistent with recessionary levels.

The Contradiction:

SO we have been seeing people purchase treasuries instead of dumping them, like i had previously anticipated. Was i wrong? Clearly i was. What did i not consider? Treasuries are the most liquid and safe security on earth and quite frankly there is no close substitute.  Gold is not a substitute even though there has been quite the flight to it. Why? Its not very liquid and therefore don’t depend on it as much for collateral.

Whatever the case may be we are seeing something extraordinary and totally expected:

Please people! Keep Dancin’

Steven J.

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