Posts Tagged ‘Dow Jones’

How does the market keep going up when we are racking up all of this debt?  How can the market be positive with a shaky future of trillions upon trillions of dollars of debt?  Well the key word has always been in the future.  That big debt problem has always been looked upon as a problem that our kids are going to have to contend with.  

As long as the Government continues to finance the deficits, everything will be OK.  What if we are getting to a point where financing debt becomes the problem?  Well, I see it becoming a problem in 2 phases.  The first phase has to do with our potential lenders.  In the past, other countries have been willing to lend to us.  Today, they are demanding higher interest rates for loaning the US money.   The second problem occurs when even higher interest rates do not even matter.  A serious loss of confidence has occurred.  We just cannot get enough money borrowed to cover the problem.
I think that last week we saw phase 1 occur for the first time.  Last week, we had 3 big treasury offerings.  The demand to buy our treasury bonds was very weak.  As a result, we started to see interest rates climb.  Rising interest rates in a debt-filled world is problematic.  For one thing, this has an indirect effect on mortgage costs.  In order to lessen the severity of the foreclosure crisis which has a direct effect on whether or not the real estate markets ever bottom, interest rates need to stay down and not rise.
One other interesting development is that investors are being paid more for holding treasuries than in corporate bonds.  You see this in the interest rate swaps market.  This signals that investors feel more confident and that they are taking less risk by holding corporate bonds rather than those of the Government.
One of the downsides of this healthcare bill passing is the publicizing of the additional financial burden this is going to create in the future.  This brings the reality of our trillions of dollars of debt to the fore-front.  Don’t for a minute believe that this will cut the deficit.  The CBO’s analysis is performed using government accounting and “estimates.”   When has the Government ever gotten an estimate correct?   Then you have Greece showing us what our future more than likely looks like.  All of that gives investors a reality check and makes them think twice before loaning more to the government.   
Watch the interest rate on the 10 year treasury bond.  Below 4% we are fine.  Above 4% creates a dicey environment.  As I write, we are dangerously close that level. 
Incidentally, the Government has to raise 1.6 trillion dollars to cover the short-falls for the year.  That is on top of the 2 trillion that needs to be refinanced this year.  
On a Lighter Note…
How about this for a vote of confidence for the politicians?  Since 1897, a year after the Dow Jones started, 90% of gains came on days when Congress was out of session.  This body of research also looked at how investments would have performed while investing in the days that Congress was in session and out of session – The out of session investments strategy had investment returns 100 times greater than when Congress was in session.

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When everyone thinks the same way, everyone is likely to be wrong.         The Art of Contrary Thinking – Humphrey Neill

Everyone thinks that we are going into hyper-inflation.  I have argued that deflation is more of a problem than anything else.  Debt is a deflation problem, not an inflation problem.

Unfortunately, time is the only thing that cures a debt crisis.  You just don’t have the elements that create inflation.  People are not going to all of the sudden start buying things and circulating printed money.  All of that money that is being printed will be absorbed by debt and losses. 

Scott Burns wrote a good piece the other day about his discussion with Lacy Hunt.  It is a good hysterical perspective on deflation.  Ironically, he talks about Irving Fisher in the article and refers to him as the greatest American economist.  Irving Fisher was the same guy who argued repeatedly that there would be no depression or stock market crash prior to the Dow Jones Industrial Average losing -86% between 1929 and 1933.  Most of his work on deflation was written in 1933 with the Great Depression as the backdrop.   

The difference between the Great Depression and today is that the Government has been more proactive in solving the debt problem.  The similarity is that both situations (1929 and today) were created as a result of a debt crisis.

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