Few Notes on the Current Market Situation

1) It seems that the US Government is determined to dilute its creditworthiness, and extend a large amount of credit to Fannie and Freddie. My view is that it will not lower yields for Fannie and Freddie as much as raise yields for Treasuries. The debt level of the US Government is rising — they haven’t absorbed the debts of Fannie and Freddie yet, but they might. Articles:

»  Fannie/Freddie support increased
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»  Government by Stealth: the GSE affair continues

2) The Health bill… Senate bribery is rarely so blatant. This bodes ill for our republic. One consolation is that the reconciliation process will be tough, and will possibly result in a bill that one chamber or the other cannot pass.

3) When I was a corporate bond manager, the bulge-bracket firms would approach me with novel investments. I would buy a modest number of them. Why not more? Wall Street is always looking for patsies to lay off risk to. When you are dealing with the big guys, the way to win is to avoid losing. They aren’t your friends. Avoid complexity and novelty, particularly when spreads are tight.

But I have little sympathy for those who were chasing yield and now say that they were cheated. Pigs. Yield is never free in tight spread environments. As Buffett has said, “Be greedy when others are fearful, and fearful when others are greedy.”

4) The Treasury curve continues to widen. We are in “interesting times.” How much debt can the US Government issue before the debt markets choke? I don’t know but keep putting more straw on the back of that camel.

5) So the 2000s were a rough decade, the worst that we can remember. Many think that means the next decade must be good. But as I commented at Abnormal Returns:

Too many people think we couldn’t have another negative decade in the 2010s. I don’t think it is likely, but opinion is too universal there. After all, consider Japan — it has had two lost decades in a row, and we are following something close to their monetary and fiscal policies, minus the fact that Japan at present self-funds their debt and we don’t.

That’s all for now. We are in an ugly situation where most investors do not grasp the gravity of the troubles we are in.

About David Merkel 144 Articles

Affiliation: Finacorp Securities

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website RealMoney.com (http://www.RealMoney.com). Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that.

In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm.

Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.

I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

Visit: The Aleph Blog

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