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Below Thursday’s Headline


Thursday’s big 200 point rally of the Dow was ignited by the surprisingly strong GDP report for the third quarter. It was a healthy 3.5%, which was substantially stronger than the 3.2% that was widely expected. Of course, when the market realized that number was “juiced-up “on steroids from the stimulus, the market dropped almost 250 points the next day.

But, nobody noticed some other good news on Thursday. For the week, the Federal government had to sell a whooping $123 billion in Treasury bonds to cover continuing large deficits. Normally, the bids for such bonds are twice as much as the amount offered. This week, there was three times as much. With all the concern about whether the U.S. could continue to finance its huge deficits, this was very good news. Even better, 75% of that demand for Treasury bonds came from Americans, not foreigners. Can you handle even more good news? Historically, commercial banks have kept about 20% of their assets in Treasuries. Today, it is only about 14%, which means they will be buying more of our Treasuries as they heal.

The nightmare scenario is that we are unable to sell our bonds, either because the credit of the US government is questionable or because the strength of the US dollar is questionable. The first does not appear reasonable, as our bonds are selling nicely. The second is more worrisome. Long term, the dollar must depreciate, to help our exports and to help create the inflation needed to manage our heavy debt burden, by “inflating it away”. But, it must be done slowly!

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