DEBT CRISIS? It’s a RED HERRING!

The U.S. debt crisis? Yes, it’s a red herring. Today Obama went on television to calm America and was no doubt hoping to convince financial markets to relax. He said there will be a compromise…and meant it.

What he didn’t say, is that the debt ceiling only prohibits the U.S. government from issuing bonds to finance ballooned congressional budget (thanks to the financial and subsequent economic crisis) obligations. There’s no reason the government couldn’t issue money market (very short-term) to meet it’s immediate needs, or find some other way around the problem. Fact of the matter is that if ever there was a time to be allowed to issue longer term Treasuries it’s now. The following news (Toronto Globe & Mail, Friday July 19th), concerns the Canadian banks but is representative never-the-less:

Facing a political stalemate in the United States that has the potential to cause upheaval in global financial markets, Canadian banks are stockpiling cash.
In the course of just eight days, four of Canada’s largest banks have tapped investors for almost $6-billion in new debt. That total is about three times as much as the Big Six would typically raise in one month, highlighting their desire to raise money at a time when borrowing is cheap and foreign investors crave Canadian-dollar investments.

Stripping out the ‘explanatory’ stuff (what the press makes up in order to turn simple news into some kind of story); the banks are smart and using incredibly low interest rates to bolster capital. This is exactly what Obama wants to do (and Washington must do), and the Republicans are quite aware that in the long run the initiative will work in favour of the Democrats – financial flexibility at low cost and at the helm while things improve for the U.S.

You’d think (reading the so-called ‘analysis’ by journalists) that our Canadian banks are afraid the stalemate in Washington might cause global markets to implode…BUT NOT SO! A strong C$, low cost debt, and foreign demand for optically (if not really) safer bonds to hold – owning Canadian corporate bonds right now makes senior investment officers, compliance people and (groupthink vulnterable) committees feel they’ve done their fiduciary duty – all make this an ideal time to borrow money for Canada’s banks. It’s pure economics, not related to the red herring debt crisis.

As my friend Jim Rogers (author of Investment Biker, Hot Commodities and other great titles) wrote in Adventure Capitalist (2004 Random House) wrote: “You know a market has bottomed out when everybody gives up in despair and does not want to even talk about it.” Or as I suggest in my own book “Minimum risk occurs when perceived risk is at a maximum.” We therefore may be at one of those rare points in time when the U.S. Stock Market is a (contrarian or ‘maverick’ thinking) screaming BUY!

An economist (insert jokes here) on television remarked (just before I wrote this rant) that she could not see anything but headwinds for the U.S. or any other economies. I can’t think of a better reason to invest heavily right now…..seasonally (summer is always a good time), strategically (consensus is miserable) and economically (corporate U.S. is recovering nicely – please refer to prior postings). ROCK ON!

About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He recently authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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