Last week proved to be en encouraging for the global equity markets, but today’s performance took back a good percentage of those gains. I see the news only getting worse and not better. Our economy is in deep do do. Yes some stocks are cheap, but overall I think buying credit is still a lot cheaper. The challenge is figuring out how to do it.
There has been much news about the cumulative size ($6.3 trillion ??) of all the government and treasury programs that have been implemented to help stabilize the market. As I have written about before I am very concerned about what this ultimately means for both the US dollar and US interest rates, but for now it seems they have little choice. As many people smarter than I have pointed out, severe deflation is NOT an option. For a good piece explaining why check out this OPED by Clive Crook in today’s FT. They are injecting massive amounts of liquidity in to the system hoping to keep inflationary expectations alive.
Of note from last week is that Goldman was able to raise $5 billion at an effective rate of 3.36%. A great deal considering their non-guaranteed paper was trading at close to a 9% yield. No wonder their stock rallied. Not surprising that they were the first to do this. Talk about a great deal. Under this “temporary liquidity guarantee program” expect up to $300 billion in issuance. Will some one please explain to me why all the debt that government is now guaranteeing is not trading at somewhat close to the same yield? Is there some pecking order that I am not aware of. Either the gov’t makes good on all of it, or none of it, right? Treasuries, agencies, home loan bank paper, and all the other stuff they have back stopped should be viewed to have similar credit risk??? Even mortages, absent the optionality, should be trading on top of treasuries. I don’t get it…….