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Debt Moratorium with 1%Tax? The Arctic Mouse that Roared
We derive real interest rates by adding the –15.2% decline in GDP last year to nominal rates of 4.25% for a real interest rate of 19.45%.
Despite an EDV target of 113, a funny thing could happen on the way to windfall fixed interest rate profits, which is why we keep our MOC Market on the Close GTC Good Til Cancelled Trailing Stop Losses in place.
If so-called Bond vigilantes decide there are growing risks of repayment or even debt service due to falling tax revenues and perhaps a capital strike or debt moratorium, higher defaults or the renegotiation of mortgage payment terms, they will demand higher long-term interest rates to reflect higher risk.
What this means is that not only will bond prices fall with higher interest rates, but so will Price to Earnings ratios, to reflect higher earnings yields and dividends.
The idea of earnings, let alone rising sales revenues at many of the largest 500 companies is perplexing, curious to say the least.
After falling -19.85% in Summer, Fall revenues may in fact have a rebound due to aggressive Fed Bank lending, mark to market, TELF and TARP if not Cash Clunkers or PPPIP, particularly with the financials.
www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS
Of course these quick fix free lunch government policies robbed Peter now to pay Paul tomorrow. Recent declines in corporate revenues and Financials suggest Mr Market may be figuring this out now.
It is earnings that drive stocks and the economy.
The current 4.25% long bond suggests PE Reported Price to Earnings ratios for the stock market might be around 24 to be in equilibrium, whatever that is.
That the actual stock market PE is closer to 133, corresponding to a long bond yield of 75 basis points (.0075) suggests all may not be well in financial markets these days.
With the much larger 4.25% long bond market rate, either earnings may quintuple to bring stock market PEs down to 24, stocks may fall 82%, bonds may quintuple in price, or we may see some combination of these three wild market adjustments to face financial reality.
