Friday, March 26, 2010

Warren Buffett a better credit risk than Uncle Sam???

Michael Barone, a sober political analyst, is taking a look at recent economiccs, in particular the bond market. I'd love to hear from those of you whose livelihood depends on making financial recommendations, Barone isn't the only one saying this but this is a condensed argument.


  1. Mr. Kresta, what exactly do you want to know? This article can be taken several different ways, and can be discussed along several different veins. Where to begin? I work at a private equity fund (not a hedge fund) that manages equity investments across many categories, so I hope that my opinion may be one that you want.

    The first, and most obvious and ubiquitous, point is that Mr. Barone (rhymes with my sister's last name) speaks about debt and equity markets as indicators of the perceptions of the strength of the United States government's ability to finance its endeavors. What about social security's massively underfunded liability? This is only going to grow as Baby Boomers continue to retire without having left enough children on the planet to work their jobs. The markets perceive this, albeit somewhat shortsightedly. It's a subjective opinion about what exactly this cost will be.

    Furthermore, looking at the debt and equity markets as measures of the strength of our economy is a sad state of affairs in itself. I don't think Adam Smith (whom I think you know I don't consider an economic saint) would have every guessed that a stock market would gauge an economy. As we move away from real production towards a service economy that happens to manufacture shampoo and assemble foreign auto parts into a car, we'll wonder how the low prices we demanded at Wal-Mart possibly drove us to bankruptcy. The simple realization that putting all of our eggs in the stock market basket so that we could track the price of a piece of paper (morphed into a "ticker symbol") that would gauge our happiness upon retirement will set us straight.

    As our Holy Father recently said:

    "Development requires attention to the spiritual life, a serious consideration of the experiences of trust in God, spiritual fellowship in Christ, reliance upon God’s providence and mercy, love, and forgiveness, self-denial, acceptance of others, justice and peace." (Caritas in Veritate, #76)

    "Requires" is the operative word of course. I think it remains up to us, as Christians, to witness to the presence of God in this world. That includes this country that continues to drive itself into an economic, moral, political, and social creek that starts with a 'S'. And we know what happens once you get up that creek without a Paddle.

    Mr. Kresta, are you aware of a site by the name of "The Front Porch Republic"? It's a pretty conservative group whose thoughts are so far above my own.

    I'll end with a few references that may be of interest to you, or some other readers:

    I'm not sure if this is the commentary you wanted, but it's out there now...


    Matthew Wade

  2. Matthew,
    Barone tells us that these few companies can borrow money at cheaper rates than the U.S. Should one conclude then that these organizations have better long term prospects for prosperity? Or is this simply an odd, shifting circumstance that one shouldn't read too much into?

  3. Matthew,
    I'm spending some time familiarizing myself with Philip Blond who Front Porch Republic is quite high on these days.

  4. Mr. Kresta, long-term prospects shouldn't be evaluated based on 2-yr. rates, which are what Mr. Barone's article references. Mr. Barone is merely pointing to an interesting blip in the investment radar. The treasury yield curve is still upward sloping, which is a good sign. Similarly, the corporate yield curve is upward sloping. I've not heard this talked about too much. What might be happening is that the two-year window on Obama's presidency, and the uncertainty associated with the elections in two of the three branches of government, may be causing some extra skepticism in the bonds markets.

    Do I think the long-term prospects for the U.S. government are weak? Yes. Did I arrive at that conclusion with the help of studying bond rates? No.

    Regarding Philip Blond, I haven't been following FPR that last week or so, with exams coming up, but I've seen some recent articles about him. Perhaps I'll get around to reading them; but he's British, is he not?


    Matthew Wade