The Exodus: Investors Abandon U.S. Stocks and Dollars for Safer Government Securities

It appears the recession has begun. Whether it be the Euro-Dollar conversion ratio or the high probability that the Federal Reserve Bank will lower interest rates for the second month in the row, all signs point to the conclusion that the Untied States’ benign economy of the past several years is long gone. And it gets worse. As American and international investors’ views of the U.S. economy worsen, the credit crunch will continue to tighten the liquid markets of the economy. Most notably, investors are increasingly opting for the “safe-bet” investment–U.S. Treasuries–and pulling their cash out of illiquid and more risky securities. As reported by Bloomberg, Thomas Roth, head of U.S. government bond trading at Dresdner Kleinwort said, “The fear is back… Where there’s smoke there’s fire, and people are just running back into Treasuries.” But can investors really be blamed for lacking confidence in the economy when its chief financial advisor–Mr. Ben Bernanke-describes his job of assessing the U.S. economy as “a formidable challenge”? Surely one’s confidence might fritter.

As bad news keeps rolling in, including the increased speculation that the Fed will lower interest rates again, only one word can describe the condition of the U.S. securities market: chaotic. The stock market took a big hit last week with the untimely increase in the price of crude oil to just over $90 per barrel for the first time ever. The news sent investors scurrying to liquidate their commercial paper and stock certificates in exchange for lower-yield Treasury securities. Meanwhile, U.S. Treasury bonds gained for a fifth day in a row and two-year notes headed for their biggest weekly increase in more than five years. The emigration of people into the government-issued securities market has caused yields to decrease while prices soar. According to Carl Lantz, an interest rate strategist at Credit Suisse Group, the yields have decreased due to the “flight [of investors] to quality [securities], people gravitate to the front end as they seek the most liquid securities" (yield curve on left). Speculation casts light on what may lie ahead in the near future, as futures traded on the Chicago Board of Trade suggests with 92% certainty that the Federal Reserve will reduce "the target rate for overnight lending between banks by a quarter of a percent to 4.5% on October 31st," cites Bloomberg.

The negative trend and the resulting fear of the U.S. economy are as prevalent in the global markets as they are at home. Ironically, the International Monetary Fund (IMF) and The World Bank just completed their annual meeting with a concluding emphasis on the uncertainty of the U.S. markets. In a public statement made Monday, October 22nd, Rodrigo Rato-head of the IMF-spoke to the risks of an "abrupt fall" in the U.S. dollar linked to "a loss of confidence in dollar assets," reports Breitbart. "The uncertainty comes from the downside risks that are much larger than they appeared six months ago," said Rato. And indeed he is correct; the recent fall of the U.S. dollar amidst foreign currencies serves as clear proof that the market has changed. The most glaring example of such change comes in the sharp contrast between the success of the Euro in the face of the U.S. dollar's demise. While the dollar is suffering in foreign exchange rates across the board, the Euro rose to an all time high (worth $.14738) as of November 3rd. Yahoo Finance reported "the dollar has been under pressure over concerns about the health of the U.S. economy, which have encouraged speculation that the Federal Reserve will soon cut interest rates again." This coming at the same time that Mr. Rato is declaring the Euro might want to "temper its strong appreciation." Curiously, while the Fed may feel pressure to lower interest rates in order to spark the U.S. economy, the decision will also continue to deflate the value of the dollar relative to foreign currencies.

A month ago, when the Fed cut interest rates for the first time in response to the housing crisis, it was speculated that the U.S. economy would be entering a recession, if it had not already. According to Mr. Bernanke, the economy is sending “mixed” signals, as there is “continued weakness in the home sales and construction alongside a solid labor market...". Now, a month later, the situation is still deteriorating: the Fed is on the verge of cutting interest rates by another quarter percentage point, the U.S. dollar and economy are simultaneously going down the drain, and our elected leader is having a tough time "analyzing" the American economy. God help us.