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Goodbye to the Good Old Days

Last week, the yield on the 10-year U.S. Treasury note recorded its biggest one-day jump in years and breached the five percent level for the first time since July. Other fixed-income markets quickly followed suit, hurt not only by a nominal rise in rates but by a jump in risk spreads. One trader described the sell-off in the mortgage-backed securities market as "a good old-fashioned mortgage puke."

The ostensible reason behind the sudden jitters, following a period when yields were already drifting higher, was the decision by European and New Zealand central banks to boost short-term interest rates. What's more, a smattering of positive economic data finally convinced some investors that the Federal Reserve meant business when it said rising inflation was its main concern.

The turmoil was not confined to fixed-income markets, however. Most U.S. and European stock markets were also rattled, after testing new highs only days earlier, and emerging equity and currency markets also got slammed by a bout of heavy selling. Precious metals prices slipped amid liquidation pressures and short-covering in the dollar, while options premiums rose, as the VIX index, or "fear gauge," broke out from a multi-week base.

There was trouble in other quarters, too. The Wall Street Journal reported that some recent leveraged buyouts were starting to trigger alarm bells, noting that it was "striking how quickly a few of the deals have run into problems." A Federal Reserve loan officer survey indicated that lenders were not only tightening standards on subprime loans, but were beginning to closely scrutinize some prime borrowers. Another recent poll noted that corporate chief financial officers had turned pessimistic on the U.S. economy.

Elsewhere, a report revealed that analysts, in a rare move, had downgraded earnings forecasts for a number of investment banks, whose financial vitality is often seen as a leading indicator for markets as a whole. There was also growing speculation that Goldman Sachs and other bulge-bracket firms were considering a hiring freeze, which is not the sort of step that is taken lightly by revenue-hungry operators.

On the political front, the immigration reform bill, apparently crafted with bipartisan support and announced to great fanfare only weeks ago, was suddenly dead in water, amid infighting among and between party members on all sides of the aisle. Overseas, the G8 meeting of leading nations not only failed to reach agreement on its loftier goals, but participants seemed to come out of it with relationships that were worse for wear.

Tensions also flared up in hotspots around the world, and oil prices approached a record $70 a barrel. In Turkey, there were reports of troop incursions into Iraq and word that the Turks had declared martial law in the border area between the two countries. North Korea confirmed that it had recently tested short-range missiles, while Russia threatened to aim its missiles at Europe. In Pakistan, there were revolutionary stirrings as protests against the president swelled.

All of a sudden, it seems there is a great deal of anxiety around, not only in matters of money, but in a more general sense as well. Where once there was seemingly endless complacency, there is now growing pessimism and serious doubts about what the future may bring. In the financial markets and elsewhere, ties woven in an era of globalization and good times are being stretched thin, and some threads are beginning to unravel.

Perhaps it is nothing more than coincidence. Many analysts, for example, might view recent financial market turmoil as a knee-jerk response to global monetary policy changes. By the same token, political observers might interpret the near-term scotching of immigration reform as an unfortunate byproduct of pre-election posturing. Those who follow international affairs might blame developments in Turkey and Pakistan on fallout from the war in Iraq.

Even so, it is hard to believe that this abrupt and widespread change in mood, coursing as it has through the world of money, politics, social relations, and international affairs, is mere happenstance. Or that a wide range of catalysts with nary a common thread between them all seem to be causing events to turn in the same destabilizing direction.

Instead, it seems likely that we are on the periphery of a dramatic and potentially far-reaching transition to a new, more hostile environment -- one that most people are both unfamiliar with and ill-prepared for. Odds are that it will be a dangerous, costly, divisive, and debilitating period, when all sorts of relationships and assumptions will be severely tested.

Like it or not, it looks like it's time to say goodbye. Goodbye to the good old days.

 

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