Discounting the Coming Production Boom

This blog post originally appeared on RealMoney Silver on June 11 at 6:57 a.m. EDT.

A second-quarter "growth scare" bursts the bubble in the government bond market. ... The U.S. economy stabilizes sooner than expected. After a decidedly weak January-to-February period (and a negative first-quarter 2009 GDP reading, which is similar to fourth-quarter 2008's black hole), the massive and creative stimulus instituted by the newly elected President begins to work. Banks begin to lend more aggressively, and lower interest rates coupled with aggressive policy serve to contribute to an unexpected refinancing boom. By March, personal consumption expenditures begin to rebound slowly from an abysmal holiday and post-holiday season as energy prices remain subdued, and a shallow recovery occurs far sooner than many expect. Second-quarter corporate profit growth comfortably beats the downbeat and consensus forecasts as inflation remains tame, commodity prices are subdued, productivity rebounds and labor costs are well under control. ...

The yield on the 10-year U.S. Treasury note moves steadily higher from 2.10% at year-end to over 3.50% by early fall. ... Foreign central banks, faced with worsening domestic economies, begin to shy away from U.S. Treasury auctions and continue to diversify their reserve assets. By year-end, the U.S. dollar represents less than 60% of worldwide reserve assets, down from 2008's year-end at 62% and down from 70% only five years ago. ... Importantly, China not only is no longer a natural buyer of U.S. Treasuries but it is forced to dip into its piggy bank of foreign reserves, adding significant upside pressure to U.S. note and bond yields.

-- Doug Kass, 20 Surprises for 2009 (Dec. 28, 2008)

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