JasonC

Corporate Bonds Haven’t Been This Cheap Since 1932

The original article writer has it right, all the comments are worthless noise in comparison.

Bailout Cost, per Taxpayer, by Income

No, we will grow 6-7% per year long term average after all the noise.

The market dropped 777 points on Monday. But the same index was *worth* 777 points at the 1982 low, 26 years ago. In 26 years, a day's hard fluctuation is the size the whole market was then.

The permabears will be screaming "doom, doom" when the market drops 10,000 points in one day, 26 years from now. All the way down to 175,000.

Perhaps it won't be quite that good, and perhaps it will meander around for 5 years before taking off again. Or perhaps it will take off within 6 months after a bailout bill passes. Nobody knows, and I for one don't much care. As long as we don't deliberately nuke the golden goose that is our financial system, a generation from now every doom mongering short today, will look as dumb as the doom mongering shorts of 1982. Who all said that recession was Hoover all over again and Reagan was a dunce, etc, etc.

Bailout Cost, per Taxpayer, by Income

The UST collects 20% of national income regardless of policies, tax, spending, funding, investment, any of it. That is the econometric reality.

Therefore, the only question and I mean the only question on the cost of this policy is whether it will raise or lower future GDP. If it will raise it, it will pay for itself many times over. If not, it will cost something.

But a very modest something. Our actual collective wealth is not the money lying around, or the inventories, or even all assets at their current prices, let alone the prices they would fetch in a general deflationary smash. Instead, it is our entire future income stream, also known as the economy. Which is $14.3 trillion a year and rising 6-7% a year forever.

Nobody debating the subject is remotely sane or thinking like an economist, and it show. One entry accounting and tendentious spin is all you see.

Silver Linings: Allure and Risk

Remember, those are the amounts *above* what a treasury bond of the same maturity, is yielding. With 10 years at 3.75% or so, a 4% spread means 10 year debt is available at 7.75%.

As for what future credit losses will be, the past is some guide though not a perfect one. You can simulate the losses on bonds of a given rating using the downgrade and default chances per year Moody's publishes. BBB rated can have credit losses in the 0.5 to 1% a year range, but not in the 4% a year range. Meanwhile As can be bought today for spreads not much less than that, with 0.5% historical credit losses, or less.

In the unfavored sectors it gets even more extreme. Real estate names, add a percent. Banks, add a percent. Regional banks smaller than the top tier, add another percent or two. A rated regionals are trading like single B junk, as though a third will default within 5 years. And unless the banking system collapses, that's nuts.

5 years from now this crisis will be a memory, and spreads will be normal. A few companies will have blown up in the meantime, to be sure. But these spreads cover a multitude of such problems, as will appreciate from spread contraction on all the bonds still paying, when things return to normal.