The Sage of Bay Street

Credit Started This Recession; It Will Also Help End It

Interesting article. What surprises me is the thought that a "credit crunch" was a recently invented phenomenon. Banks have historically been involved in other "bubbles" over the last twenty or thirty years. There was the Latin American bubble, the oil patch bubble, the real estate bubble and others in previous decades. Too much capital chasing too few deals. These all resulted in the closing of the lending window at many financial institutions. In the end, banks and other lending institutions cannot satisfy their investors and other stakeholders by investing in negative yield treasury instruments. They need the cash flow to keep the lights on, pay salaries and offer a reasonable return to investors. So when the dust settles, the lending window reopens until the next blow up. Every financial crises brings out the banner of "this one is different", as does ever stock market euphoria. Unless there has been a change in the economic laws governing financial markets, the ship invariably rights itself. The question is how long will it take and how much pain will we suffer before we get there.

Is the Long Bond Cracking?

The demise of an investment in Treasury bonds has been a theme repeated for a number of years now. Perhaps it's finally true. I analyzed the returns on five year treasury bonds for the last thirty five years. The assumption was that the individual investor purchased the five year "on the run" Treasury bond and sold it at the end of the year crystallizing the capital gain or loss and repurchasing the five year bond for the next year. In this way, the investor always held a five year bond. I believe that the bond return slightly outperformed the returns on the Dow Jones Industrial Average over the corresponding period. If this is incorrect, comments appreciated. If this is correct, perhaps a review of the longer term outlook is warranted.