If it is so bad in the U.S., why is money flowing to the U.S. Treasury? We have now seen the 10-year bond dip below a yield of 1.5 percent, as a definite flight to safety is accruing with demand driving yield to historic lows. In April, the yield on the 10-year bond was 2.4 percent, and a year ago it was over 3 percent.
Europe is not getting any better with recent downgrades of Italy and the U.K., not to mention the Spanish bank debacle. With no buyers, Spain’s 10-year bond yield is approaching 7 percent for just the opposite reason. There is a lot of talk at G-7, G-20 meetings, etc. with no lasting resolution in sight. Investors like the famous George Soros gives the EU crisis approximately 3 months to be resolved, with the possibility of Europe becoming a “German Empire.” S&P gives the Euro a one-in-three chance of collapsing.
Things aren’t any better in Asia because China’s biggest export market is Europe, which consists of 18 percent of its overseas shipments. JP Morgan has lowered China’s 2012 GDP annual growth to 7.7 percent from 8 percent. This still seems strong but compared to the recent norm of close to 10 percent, there is concern in the markets. Japan’s TOPIX Index is at the lowest point since 1983.
Just this past week we saw the slowdown’s effects on commodity prices with oil down $10 to $83 a barrel and copper expected to drop another 25 percent from current levels.
The drop in commodities and the general global slowdown is also affecting Latin America. Brazil’s stock market has been tanking and the respected Chilean market is down almost 20 percent from its highs. The most worrisome is Argentina, which just nationalized its oil industry. The Argentinian government has implemented currency exchange controls causing a two-tier valuation in respect to the dollar, which is in high demand. If you are the typical U.S. tourist in Buenos Aires, you can get Argentinean pesos from ATM machines at a current government rate of about 4.5 pesos to the dollar. Conversely, if you were to exchange dollars at the neighborhood “Cambios,” you can get approximately 6.5 pesos to the dollar. That’s an almost 50 percent bump in value.
Money is flowing to U.S. dollars. People are looking for safe havens and the preservation of capital. And with all the noise we hear from our leaders in Washington D.C., the U.S. is that safe haven, at least for the time being.