A Model for Federal Equity, not Debt

Given that the stock market appears to finally be taking a pause after a decade long run, this may seem like a terrible time to talk about subtleties like debt versus equity or how to finance federal debt. Yet this is exactly the time when something like what is proposed here would be useful for the government and investors alike.

Our national debt is financed through a complex system with fixed interest and market trading which is cumbersome and difficult. Worse, it ties the government down to fixed costs which are currently taking up 329B$ per year in interest payments, nearly $3,000 per household.

In short, there has to be a better way to manage the 21T$ or so of debt. Step one would be not creating more, but here is a plan for managing the potentially crippling debt we already have.

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Yes, But How is It All Screwed Up?

We’ve made the Barataria position very clear – that current federal policy is doomed to trash the stock market and somewhat damage the overall economy. That wasn’t talking about new tariffs, however. As the mechanism for screwing things up shifts, the predictions as to how it will all go down have to shift.

So here we are, trying to make some sense of the senseless. It’s more of a crapshoot every day.

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Inflation is Back

Inflation is back. What’s left to see is what anyone does about it.

The Consumer Price Index (CPI) for January came in at a strong 2.1% over the last 12 months. That’s above the target rate of 2.0% set by the Federal Reserve for the fourth month in a row. There will be attempts to explain it away in various ways. In the noise that will be created over this what will count is action by the Federal Reserve one way or the other.

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A Bold Prediction

We’ve been talking about the stock market this week, so why not end it with a bold prediction: Once the federal debt ceiling is raised, look for the stock market to utterly tank within two weeks, certainly within a month.

While there are many reasons why the market is taking at least a pause if not slouching towards a correction, the most important is the appetite for government debt. A time like this requires careful management and attention to consequences. We’re not getting it. What we have instead is mismanagement on an epic scale that will certainly spook the market and ultimately kill it.

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Where Do Stocks Go Now?

Stocks appear to have stabilized after a rough week. But several questions remain. Was this a one-time shock event, or is it a correction? And if it’s a correction, how low can things go?

We can be sure that what has happened so far is not an isolated event, but part of a major change in the regime from loose, cheap money to a more normal economy. Corporate profits are high, and America is taking care of business, so there’s no apparent reason to be terribly afraid.

Yet the change is significant, and precisely how significant will not be clear for some time. Here is what to watch for as stocks and other markets absorb the change and make a transition into a new economy.

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Why Stocks Are Falling

As the eight year old bull on Wall Street is slaughtered for its meat, several questions come to mind. Is the fall likely to continue? Where will it stop? And, for those on the sidelines looking to score political points, who is to blame?

The answers to these questions are easy and a little terrifying. Yes, this is going to go on for a while. It may not stop until a lot of money is lost. And while you can’t blame anyone for actions which are cyclical, you can blame those who make things worse. The US economy is a large engine, and any good mechanic knows that while you can do a few small, smart things to make it run better it is much easier to really screw it up.

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Forcing Investment

The dust is settling. After the various panics that rocked the early part of the year, mainly due to a slow-down in China and the developing world as a whole, Brexit put another shock to the system. Markets panicked and everyone became even more risk averse. But with just a little bit of time we can see that even more than we predicted at the start of the 2016 one thing has become obvious by mid-year – the United States is the only solid place for any kind of investment in the world.

It’s still a tough fight to get the money to where it does the most good, at the risky start-up end of the economy. And there are plenty of signs of fear running amok more generally, expressed in the price of gold. But there is little doubt that the US is the place to be – all the moreso with Brexit.

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