Thursday, October 8, 2009

Who cares about Latvia, anyway?

Apparently the financial markets consider it a minnow in an ocean of liquidity. Stocks and bonds are all doing just fine today, thank you, while Latvia is having serious currency problems that threaten Sweden's banks, while the other Euro nations are strained themselves.
"Latvia's latest crisis unfolded as new data confirmed economic fragility across Europe, where nine countries -- including Germany and Italy -- drew warnings Wednesday from the European Commission for widening budget deficits."
(source: WSJ)
An analyst from Brown Brothers provides more detail of some of the austerity programs -- limiting liability of homeowners. Apparently no big deal to the West, since credit default swaps are down today.

It might very well be a perfect setup, as Jansen at Across the curve points out:
"Maybe all this means that we are setting up for a giant duration grab which will leave the curve far flatter than anyone though possible. Investors will delude themselves into thinking that there is no risk in a 10 year Treasury or a 30 year bond.

When everyone is in the pool someone will saunter by and throw a plugged in toaster into the deep end. It will surely end very ugly."
(Source: Across the curve)
To which someone created a fanciful depiction of the toaster in response. One can only wonder if the founders of Thinkorswim had this type of metaphor in mind when they got started. It certainly seems appropriate.

We believe the thinkers can use today's experience to gain a better understanding why it's prudent to discount the U.S. economy bashers, as it is clear that economic troubles in the U.S. are matched by the Eurozone troubles. There just isn't all that many places to flee to if you want to stay out of financial trouble.

So it's no wonder that even in the face of massive deficits in the U.S. all the way out to the visible horizon US Treasury prices hold their own. Even if it's true that the U.S. is a sinking boat, all the other boats have big holes in the hull, too. The U.S., being the biggest boat in the pool, will most likely be one of the last to soak it's passengers.

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