7/20 Recent headline O'Neill Predicts Strong U.S. Surpluses
The article put such a good spin on the notion or paying down the
debt.
Well there is a huge huge huge huge devastatingly huge potential
problem which has been written about in the heavy econ papers
Our entire economy is based what is called the "riskless asset."
All prices of investments, be it stock, bonds, capital spending,
buying houses etc. all rely on what is called the CAP-M ( capital
asset pricing model ). This states basically that the more risk
an asset has the high its expected rate of return must be. The
expected return in the "interest rate." The problem arises in
that the CAP-M ( my nomencalture - standard is CAPM no "dash")
uses as a requirement in its calculation the rate of return of
the riskless asset. The foundation which people previously used
in this model was the 30yr US Bond.
So where is problem? The government started buying back 30yr
bonds thus reducing demand and causing a demand shock which
altered the normal curve and skewing its price. Everyone realized
this and quickly renormalized all asset prices to the 10yr bond
as it was still in high supply. However as the govenment
continues to run high surpluses the demand will continue to
shrink for the 10yr and it will no longer be effective as a basis
for the pricing assets.
Repurcussions to this are obvious. Without a standard government
based riskless asset pricing, financial institutions will no
longer be able to commonly price assets. This will cause an
increase in the volatility of equities.
Solutions- Right now that is of a big debate in the economic
field- right now the biggest option looks like fannie ma. Ya
those are the guys who own all the home loans. That is turning
into the biggest source of bonds and thus providing a basis for
stable pricing- Whenever you have bigger supply- the stability of
a price goes up. That is why when the government had 3Trillion in
bonds out the prices were fairly stable. Only recently has
volatility started to be seen. But the problem with using home
loans is obvious as well- equity bubble.
Net result. The Government is going to NEED to step up spending
to maintain a budget deficit. Maybe not now but the seeds are
being planted. Look at the signs, Cal government going into debt
over energy. This is chump change but just a sign that
governments are taking up the slack of the consumer.
Required Actions: Align yourself with an industry which will
benefit from governemt spending. Boeing, LM, EDS, Dyncorp, HAL.
Look for massive US bases setup in foreign countries. Look for
massive emigration to foreign bases. Look for a reimergance of
colonialism. The plans are in the works - and coming this fall I
am hoping I can get involved with them - as I am starting to
believe this is coming sooner rather than later.
Just commentary and by no means correct- and may not even reflect
my true views
\_ Hi kinney! |
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