Friday, June 4, 2010

Foreclosure

"The biggest company may be the weakest if its bonded debt is disproportionately large." (p. 179) Security Analysis - Graham and Dodd
This is a rather rational statement but should it apply to Sovereign Debt?

The Financial Crisis of 2007-2008/9/10? unraveled an unheeded extension on a large scale. The funny bit about all the articles which are being published nowadays is that nobody cares to mention that prior to 2008 the large amount of public debt on any country's balance sheet was not a cause for concern.
We shall dance till the music plays.
As a novice, I understand that a country's external financial obligations are fulfilled by, what a normal debtor knows as, refinancing. So when the value of your house goes up, an imprudent bank might be willing to refinance the first loan, but the value of the house goes down only very imprudent banks will refinance loans (that was supposed to be a joke).
But what if the bank ceases to exist? And what if the bank is shit scared to make any further loans?
If all banks withdraw simultaneously, the system grinds to a halt but the early movers come out as winners as they might be nimble enough to cut their losses and dive in at an opportune time.


Japan is a creditor to many European nations. What if Japan balks at the current situation and says 'My Euros are better of somewhere else!'? It then realises - hey, I don't know where to go with this chunk of Euros :(
Same with China & the US.
But this situation means that debt levels will grow indefinitely. What else could a China or Japan do? Can it demand higher interest payments? Sure.
But what would that accomplish? More dollars for China that go to... US (again).
But as a short term mechanism this makes sense.

I wonder if China is saying, "Bloody Fuck!!! What do I do now???? I hate these Dollars!!!!"
And what if (and this is my favourite part) China decides to be like Fransisco D'Anconia. "Fuck this shit! Down with everything :) - Because in the end, we will still have our military supremacy and because we are the first movers, we will be in the best position to dance by the graves."

In such times, what should you trust?
The paper currency in your wallet which can be printed at the whim of any central bank.
Gold, a metal which has barely any practical use and the actual quantity and holders of which are not known and cannot be audited.
Real Estate, Dependant on how moody people choose to be.
Companies, which make money even in bad times? - Oh! There we go.
There shall be a time when people ought to dive into stocks because that could well be the best time in this 21st century.

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