[AlCzervik]

$this->bbcode_second_pass_quote('', 'B')y the third time this morning that Brad Setser's "scary graph" had flashed before my eyes as I made my way through the econoblogosphere, I knew it was time to start paying attention.

Setser, an economist at the U.S. Treasury Department during the Clinton administration, focuses obsessively on international capital flows. It's a complicated subject; following the ins and outs of his detailed analysis is not for the timid of heart. But the bottom line expressed in the chart is simple: Based on Setser's interpretation of Treasury Department data, private foreign demand for U.S. assets has come to a screeching halt. (Setser uses the term "sudden stop," which has its own specific meaning in the world of emerging market economics, but we'll leave that discussion to the card-carrying economists.)

Look at the graph. Sharp drops and equally sharp surges have been reasonably common since 2000, but nothing compares to the plunge that started in July. What else happened this summer? The subprime mortgage meltdown precipitated a major credit crunch.

[MrBill]

MrBill writes:
$this->bbcode_second_pass_quote('', 'A')nd yet the price of the 10y UST dipped slightly, but the yields are still quite low near the 4.00% YTM level? It still appears that there is 'a flight to quality' going on and that means short-term liquidity going into the UST market as opposed to taking its chances in the stock market.

Okay, the S&P is up slightly this past 3-days on news that the Fed may capitulate again, but this time the EUR/USD is steady, so it appears that only the stock market believes a measely 25 basis point rate cut is going to save investors.

Oil prices have finally decoupled from stock markets, so stock markets are getting a relief rally this week from crude prices that are retracing. Longer-term I would sooner bet on higher crude price than a higher S&P, but this is good for a dead cat bounce and some short -covering that encourages bottom pickers to come in and try their luck. I would not expect it to last though.

Back to long-term yields I think we are seeing more inflation. Even in Europe today the number came out closer to 3% inflation rather than their 1-2% range. And that is despite a stronger euro.

Going forward we may need both a weaker USD and higher interest rates to tempt foreigners back into USTs. Twice bitten, shy as heck! ; - )

[sittinguy]

GOOD POST, I got some doomer wood from that one

[MrBill]

$this->bbcode_second_pass_quote('sittinguy', 'G')OOD POST, I got some doomer wood from that one