Yeah, but the US is OK, right?

When relating the 2009 GDP figures for Great Britain it helps if you have one of those airplane barf bags nearby when passing it on.

Why? Because is it so wretchedly bad, so sickening that you’ll need it.

Here’s the headline: Britain’s recession the steepest for 88 years

Here’s the story: http://business.timesonline.co.uk/tol/business/economics/article6986312.ece

What does this tell us?

It tells me that the world economy is far from ‘ok’.. in fact the aftershock could be as bad or even worse than the initial shock.

Yeah, but the US is ok, right? Ummm well…

Fitch Ratings, the bond rating agency had some stern words about US debt levels and the fact that there is no plan over the next 3-5 years to curtail spending andor reduce the debt. The result of this inaction would be a downgrade from AAA status. A downgrade would make it even more difficult to raise money (to pay for all our STIMULUS’s – cash for clunkers, cash for houses, cash for caulkers, cash for bailouts, etc) due to higher rates we would have to pay to investors.

Here’s the story: http://www.telegraph.co.uk/finance/economics/6969163/US-must-cut-spending-to-save-AAA-rating-warns-Fitch.html

I reported this in my Daily Market Review videos: Foreign investors are selling 30 yr Treasuries in favor of 3 month T-Bills? Why? What would cause them to sell the longer maturities and buy the shorter ones at a lower interest rate now??

It’s simple, would you want to be stuck collecting a low rate of interest for 30 years if you knew rates were going higher – soon, really soon? You wouldn’t. You’d sell those 30 year, low  interest bonds in favor of the 3 month because at least with those you can roll them over every 3 months as interest rates rise and keep capturing a higher rate and who knows how high they will go? 3%… 4%…5%?

It’s simple. Those who did their homework (just about every major foreign investor) has seen the insane amount of spending the US is doing and absolutely NO concrete plan to reduce this type of spending and reduce the US debt.

None.

As mentioned in the story above, FITCH is ready to make a downgrade the US (!) unless they see something come out of Washington, but the fact is that they have raised the concern and that is enough to get more foreign investors nervous about holding those long-term maturities. The truth is Fitch, if they had any guts at all, should have downgraded the US already. But the disaster and fallout from such a downgrade would have devastated our financial system. Oh, wait. That’s already happened! So what the hell are they waiting for??

Foreign bond investors have already been selling the long term bonds in favor of shorter term bonds…. now with this warning, there will be much more selling just at a time when the US can least afford it. The US is looking for BUYERS of a $1 trillion+ in new 30 year bonds they need to sell this year alone starting with this Thursday’s $15 Billion 30 year bond sale. Where are those buyers going to come from when most foreign investors will be net sellers of the longer maturities?

What this means to you and me: Interest rates for mortgages, car loans and business loans are going higher. I’m especially worried about mortgage rates going higher. That will put an additional nail int he coffin for housing and send housing even lower in 2010.