Where Does That Leave ETF Investors?

Let’s suppose you’re right, Paul. Let’s suppose that Messrs. Bernanke, Geithner and Summers are doomed to failure. Where does that leave investors?

I wonder specifically about the comment you attribute to Steve Keen, that there really is no way out of this except to “recognise that part of the vast stock of bubble-generated debt is not going to be repaid.” Isn’t the market already doing that?

The yields on Financials debt have risen, indicating higher risks of defaults. Goldman Sachs—perhaps the best positioned of the bunch—was able to place $2 billion in bonds at the end of January, but it had to pay a yield 500 basis points above Treasuries to do it. Other companies would have to pay even more.

Meanwhile, Financials preferred stock indexes are yielding around 14%, on par with junk bonds. So despite the bailout(s), the market is clearly pricing in a risk that financial companies will default—that much of the debt simply will not be paid.

Meanwhile, there is no sign at all that the Treasury is having trouble borrowing. In fact, it can currently borrow money at 10-year Treasury yields of 2.76%. With those kinds of rates, if we as a society decide that some of the debt must be repaid to recapitalize the system, doesn’t it make sense to do so with the stronger balance sheet of the Treasury on our side? (And there’s no sign that this increase in borrowing is driving up inflation. The TIPS market is forecasting below-trend inflation for the next 10 years.)

I suppose what I’m asking is this: The market has already priced in a huge amount of failure. Bank equities have lost three-quarters of their value over the past year, and Financials-related debt is paying huge yields. Don’t you think the market has already discounted the likely scenario? Isn’t there a risk that it’s doing what it always does, and overshooting the mark on the downside just like it overshot on the upside?

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