Government bonds are hottest deal these days, Bernanke buys them, the Chinese are buying them, the Europeans are… bonds of failing states hold the real risk – debt settlement (at best) and “haircut” for holders and the risk of bankruptcy (a very bad case) could certainly ignite a serious turmoil worldwide. Although Dubai and Greece were rescued, 2011 is not going to be a simple for the rest.
The Euro – Dollar pair are playing the “who’s not as bad” game for a long time now, still undecided. What is worse? Spain, Ireland, Portugal, Greece and Italy (not to mention France and Britain)? or maybe a 14 trillion dollars of U.S. debt?
One thing is certain – the way back no longer exists. Debts of European countries will not be returned without haircuts. Greece can not repay its debts and will receive financial aid. This aid will not help lower the yields of its securities.
Even with a 1% interest rate set by the European Central Bank – Greece’s annual securities are still trading at 12% yield.
The U.S. is another story – because the dollar is the reserve currency of the world and the U.S. is a military empire – any of the holders, especially the large ones, have no interest in selling U.S. bonds, Not because they think that the American economy is so strong – they are just afraid. About two months ago, the United States had stationed two aircraft carriers near China, a hint?
I think that the market will try to repair itself in 2011 by increase in interest rates (yields on securities) – this time it will focus mainly in Spain and the U.S. bond that only way to repay their debt is to issue new bonds.
The huge short-term inflation that Bernanke has created helped push prices up, Does it help the economy? Is 9.8% unemployed in the U.S. feel better now – when they have no savings and salaries, and prices are higher? The answer is – probably not, but the show will go on as long as possible.
I think that in this area – the market will try to rectify the situation (although not the cause of it) and some deflationary effect must happen, that will clean the market and reduce prices of commodities and stocks and strengthen the dollar.
The most interesting thing will be to monitor who’s securities crash first, will it be the Europeans before the Americans, Americans before Europeans, both at the same time?
U.S. paid in 2010-200 a billion dollars just on interest – on debt. Whether this situation can continue? in my opinion, not for long.