Five 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:

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.