Alright, I swore to myself I wouldn't write anything today about the so-called "healthcare" bill. I'll try hard to keep my word since so many others are blogging about it and I've about overdosed on it over the past few weeks. But one headline I did notice over the weekend is that a number of publically traded companies’ bonds are now trading at lower yields than US Treasury bonds, signaling that the market thinks they are more credit worthy than the government, even though the government can print money whenever they feel like it. With trillion dollar plus deficits forecast as far as the eye can see, it’s not much of a surprise. The only market place discipline the government has is the level of demand for its bonds when it floats new debt. The less credit-worthy the country, the higher the risk, and the higher the interest rate.
Who are these lucky companies? You could probably guess most of them since they are stalwarts with a rock-solid reputation. Berkshire Hathaway, Proctor & Gamble, Johnson & Johnson, Lowe’s, Abbott Labs, and the Royal Bank of Canada. There’s little question in my mind that the flood of treasuries hitting market will keep pushing yields up. The healthcare bill will only make the situation worse.
In my own portfolio, I’m underweighting Treasuries and placing my faith in corporate American, the discipline of the marketplace and that corporate officers will practice more self-restraint and better financial judgment than our elected officials.
This falls in the bucket with those things we thought we'd never see. Can we now say "we've seen it all"?
ReplyDeletePerhaps not. If we continue down the same road, one day Treasuries will be junk bonds.
The fact that the government can print money whenever they feel like it is, in my view, the problem.
In 2003, Paul Krugman wrote:
ReplyDeleteHow will the train wreck play itself out?...my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar. It won't happen right away....But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.
I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared — the ultra-establishment Committee for Economic Development now warns that "a fiscal crisis threatens our future standard of living" — investors still can't believe that the leaders of the United States are acting like the rulers of a banana republic. But I've done the math, and reached my own conclusions.
The situation hasn't gotten any better.