The Shocking Reality Of What Is Happening Around The World

"Interest rates were the topic last week. Having spiked around the prospect of the Fed tapering, the conventional wisdom was that rates would go even higher as the purchase of Treasuries and mortgage-backed securities wound down. The reality was that interest rates did an about-face and plummeted....

There are two main reasons being offered for the surprise. One is that we have seen short-sellers scrambling to cover. Another is that the global economy is continuing to deteriorate. Despite the lack of mainstream media coverage, a negative print on U.S. first-quarter GDP, stories about trouble for the Chinese banking system and overall economy, and horrible quarterly earnings reports from the companies in the retail sector would corroborate that possibility as well as the short-covering. Just as everyone was convinced that interest rates could only go up, the overwhelming consensus now is that rates are going lower, perhaps much lower.

For those who have been following markets for decades, inflation used to be a big factor in determining the level and direction of rates. The important beliefs surrounding the direction of rates are that the global economy is contracting, the Fed is tapering, and sovereign budget deficits are shrinking. This would translate into further deleveraging and decelerating prices and even deflation. Locking in 2.5-percent 10-year Treasury rates is perceived by many as the remaining “port in the coming storm” and the best way to preserve capital.

There is no doubt that economic activity is heading in the wrong direction. However, budget deficits, even if one can believe the numbers, are exploding, particularly on an accrual basis. Just for the United States John Williams of Shadowstats estimates the Federal deficit at an annual rate of around $7 trillion. California is reportedly running a $60 billion annual deficit, despite having substantially raised taxes. Governments of all sizes around the world are running operating deficits and the retirement systems are hopelessly underfunded...."

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