A Quickie: Another Serious Down Day

Just time for a quickie.  The stock markets, not just the U.S., but worldwide, had another very bad day.  The major indices in the U.S., Dow Jones Industrials, Standard & Poor’s 500, NASDAQ, were all down from 4-4.6%.  This is on top of 6% decline on Monday and more declines in the last two weeks.  In fact, the last three weeks have seen the stock markets fall over 17%.

So what’s happening?  A lot of things. But as I’ve said before, it’s not worry about the U.S. defaulting on debt or having too large of a deficit.  If that were true, then bond prices would drop and interest rates rise.  Instead, we’ve seen almost as dramatic moves in the U.S. bond market.  Tonight the U.S. 10 year bond is trading with a 2.1% yield. A 2.1% interest rate!  It was 2.6% as recently as last Friday. We’re starting to see interest rates on government bonds move into the territory we say in 2008.

Yes, it’s fear. And it’s uncertainty.  But it’s fear over growth prospects in both the U.S. and Europe.  It’s also fear over financial system stability.  In the U.S., Bank of America, the second largest bank has been hit with a series of judgements,  lawsuits, and other problems dating back it’s sub-prime mortgage days that it’s looking pretty dodgy.  In Europe, the slow-motion train wreck that is the Euro and government bonds there is a serious concern.  The debt crisis contagion that started in Greece and spread to Ireland and Portugal, now seems to include Italy and maybe Spain.  Today, news came out that France’s debt rating might also be downgraded (remember, unlike the U.S. they don’t have their own central bank).  That set concerns for the health of the largest French banks.

On the uncertainty front, what the debt-ceiling debate and “deal” told us is that we’re on our own.  The politicians have no plans for helping the economy. Instead they’re in a rush to cut spending which will only make it worse.

So what to do when all looks frightful and uncertain?  Go to cash.  Or what’s essentially the same thing – U.S. bonds.  I’m not trying to recommend this or any strategy. I’m not an investment advisor. But that’s what’s happening.