Signs Are Pointing South on Wall St. Credit Woes Foster Bets on Bad Times
By Neil Irwin Washington Post Staff Writer Tuesday, November 27, 2007; A01
Wall Street is betting on a recession.
Investors in stocks and bonds are paying prices that indicate they believe a snowballing housing crisis and worsening credit crunch will soon tip the U.S. economy into a recession, analysts said. Many economists, including leaders of the Federal Reserve, don't think things will get that bad, but some say the risk of a serious downturn has risen in recent weeks.
Investors were so eager to buy ultra-safe government bonds yesterday that they were willing to accept sharply lower interest rates. The rate on the 10-year Treasury bond fell to 3.84 percent from 4 percent Friday. The low rates indicate investors expect the Federal Reserve to cut interest rates aggressively in the coming year to ease the pain of recession.
Investors eager to buy Treasury bonds are walking the economic plank, blindfolded with a sword at their backs.
Test case: Buy $100,000 in bonds. Ten years later, when the bonds mature, you've received $38,400 in interest--but at the rate the dollar has been falling, you get a 40% devalued dollar, worth $60,000 in adjusted dollars. Total for the ten year investment, $98,400, a $1,600 loss.
Which is exactly why China and Japan have been putting their money elsewhere.
Investors in bonds can count every bit as well as I can and it says volumes about their prediction of a coming crash that they are willing to take only a $1,600 loss.
If George Bush, in a frantic effort to keep the stock market from crashing while he's still in office, does as Wall Street expects and keeps dropping interest rates, the dollar (outside America) will be virtually worthless.
Hoping to leave before the curtain falls, he will have delayed an American crash by guaranteeing a world-wide crash.