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Credit Rating Mirages & Sovereign Illusion Defaults: Where to Perch?
Our $1000 moneyback subscription Summer Solstice Seasonal Letter released on 21 June 2009 may translate this into effective investment strategy using proprietary information developed over a half century in the markets since we began collecting coins.
Our ideas are up like the 320% shown in our Daily Charts with a Heart Public Portfolio at http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3251493
Past performance is no guarantee of future results, which may be better.
Thirty Year Treasury bonds peaked out last December with 2.519% yields, perhaps ending what A Gary Shilling correctly called, a 37 year bull market with outstanding returns from safe zero coupon bonds.
Long term interest costs affect every other market from equities to real property. They have a reciprocal relationship with prices. The higher they go, the lower prices go. Everything in the markets is connected as No man is an island, entire of itself… (John Donne, Meditation XVII).
LT rates already rose with monetary metals to 4.392%, halving expected Price to Equity ratios from 40 to 20. Another near doubling of long-term interest rates to reflect defaults and scarcity of savings might eventually take P/E ratios to 11. This suggests the long-term direction of the real estate and stock markets may continue down until we have enough real savings, despite recent hopeful rally exceptions.
When Arabs, China, Japan, Russia and other trade surplus mercantilist nations say No mas to Sovereign US debt, and the US Fed and Treasury resort to creating even more funny money to monetize the debt, it is not too long before Darwinian bondholders may run from debt to live another day, creating higher interest rate risk premiums, no matter how many derivatives allegedly hedge them.
It is important to note it is not inflation, so much as default risk that may raise interest rate costs.
It is quite possible investor perceptions of default versus government attempts to re-inflate may make debt markets more volatile in a long-term price downtrend and yield uptrend.
Some of the tens of trillions in creditor money maybe found itself buying high yield corporate and municipal bonds. These may also suffer credit or default insolvency risk during times of longer economic contraction, which normally reward bonds. SO much of today’s economic terrain is new to the last two generations who maybe did not believe or listen to their older relatives on Biblical and Shakespearean eternal truths such as The borrower serves the lender, Owe no man anything but love, and Neither a borrower nor lender be.
