The recent movement in global markets has me scratching my head a bit. You have people dumping gold and the Swiss Franc in order to invest in the U.S. dollar and Treasury securities. Everyone says it is a flight to quality. I do not agree. Logic has it that the U.S., as a debtor nation which is spending hundreds of billions to prop up an ailing financial sector, is not quality. It is anti-quality. So what gives?
My take is that this is a flight to liquidity. The U.S. Dollar and U.S Treasury securities are liquid markets that one can reasonably expect to invest in without worrying about liquidity concerns. To my mind, what has precipitated this flight to liquidity is the need by hedge funds to liquidate holdings as redemptions come due.
People are taking their money and going home, so the leveraged financial community is being forced to sell everything in all markets. They are unwinding all of their leveraged bets: Australian Dollar over Japanese Yen. Brazilian and South Korean bonds over Treasuries. Puts on the U.S. Dollar. Everything.
Fight to quality? Hardly. This is deleveraging. This is a forced liquidation.