Sunday, August 29, 2010


Is the U.S. the Next Bear Stearn's?----Shared By Shan Saeed

The U.S. government is handling its finances just like Bear Stearn's, paying for long-term liabilities with short-term funding. The difference is that the government prints its own currency. But the private sector has shown that’s not a very good way of running a railroad.

About 67% of the Treasury’s debt matures within 3-years. That begs the question of why the government isn’t issuing debt as long-term as it can. After all, some companies are looking at issuing 100-year bonds to lock in these low interest rates.
I see two possible explanations.

First, you want the deficit to look as low as possible now, so you keep your interest expenses low.

The second reason is more frightening. Marginal buyers of debt, in particular the Chinese, have shown they don’t want to lend long-term. They want the leverage that comes with having Uncle Sam go back to them every week or two.

That means the deficit could represent a national security issue. I don’t want to be overly conspiratorial, but certainly you’re conceding some sovereignty when you fund yourself this way. To be sure, there are signals that the Obama administration is shifting to longer-term debt. But the magnitude of the debt is so large that you’ve only just begun. As we issue debt in our own currency, we can get away with issuing so much short-term debt. I don’t think it’s a prudent or savant or sustainable approach in the long run....US dollar will be under pressure next year and might lead to currency crisis.....

Indeed part of the reason why gold is going up while Treasury yields are plunging is that people are trying to hedge inflation and deflation at the same time. Investors have little faith or confidence in the US economy..This gives you some concern about paper currencies generally.

As we look at the economy from granular view, It reflects that negative sentiments have cropped in. Analyze the equity market, S&P 500, Dow Jones....and corporate balance sheets earning for large multinationals are quite questionable.

However, there are lot of corporates that are down with historically low valuation and its good time to buy them. You can buy world beating companies at 10 or 11 times earnings. If you marry that with a fundamental belief in our system of government, which will eventually throw the bums out, there’s a lot of relative value in the stock market. Not everyone is so optimistic about stocks.

People are focused on the headwinds more than the tailwinds. Meaning that investors are more worried by weak economic data than encouraged by strong corporate profits.

Disclaimer: Please rely and research your own data..This information piece does not guarantee future earning or success for your investment strategy

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