Wow. I was out of the office most of today and really couldn’t follow the action. It looks like I missed a doozy of a day. Unfortunately, my work life is busier now than ever, so I don’t really have time to properly examine the various issues at the moment, but here’s my quick .02 on the present crash.
Why would treasuries rise after a downgrade? Well, for one, nothing really changed. Everyone already knew the U.S. deficit problem. The bigger concern was that funds would be forced to liquidate Treasury holdings. The Fed dismissed that idea (at least within our banking system). Like the ECB, we just re-write the rules when they don’t suit our preferred situation. And with that, went the risk of a massive forced sell-off. And with no forced sellers, there were plenty of folks just looking for a place to hide. That has always been Treasuries and apparently, it still is. Also (and this is a bit of an aside), Modern Modern Theory suggests that (at least in our case, as a monopoly supplier of a currency), government spends money into existence and the bonds exist only to soak liquidity out of the system. In other words, they are a relic of the gold era and no longer serve as actual government borrowing for the U.S. It is very convoluted and not all agree, but Cullen Roche at PragCap is a big proponent of the idea: http://pragcap.com/resources/understanding-modern-monetary-system
Is gold in a bubble? No. I would suggest gold isn’t rising so much as the currency race to the bottom is increasing its rate of acceleration. The ECB is firing its final salvos by directly purchasing Italian and Spanish bonds. And of course our own currency is a dud as well. So where can someone stash savings without having it reduced to litter? Gold seems to be the sole option right now. Kimble suggests next resistance for gold is around $1900.
Technical support? I have no idea. There are Fibonacci retracements that we’ll hit, but no trendlines jump out (to me) before we’re into triple-digits. We have broken under all of them. Should we bounce? Yes. When? Who knows. The McClellean oscillator is off-the-charts, begging for a bounce. Way, way, way below the worst of 2007-2008. In fact, the McClellan report had an interesting report noting that last Thursday’s “washout” is typical of a bottom. That was before today’s 6% loss (+ working on another 2% down after hours as I write). Breath-taking.
Why now? I’m not sure. The economic fundamentals are terrible. The market has (in my view) been supported by phenomenal corporate earnings (at an all-time record) and record margins. But many of the national economic numbers haven’t budged much from 2008 – so we had a fantastic few years of corporate profit at the expense of society as a whole. Maybe that realization is hitting. Maybe it’s a growing lack of faith in the Central Banks that have helped build these ponzi bubbles. I don’t know. But it certainly seems as though we’ve hit a tipping point. I’m not expecting to buy a dip anytime soon (although, at some point, we will have a mind-blowing multi-day rally before continuing lower, imho).