The U.S. government is handling its finances just like Bear Stearns, paying for long-term liabilities with short-term funding, says Jason Trennert, chief investment strategist at Strategas Research Partners.
The difference is that the government prints its own currency. “But the private sector has shown that’s not a very good way of running a railroad,” he told WSJ.com video.
About 60 percent of the Treasury’s debt matures within three years. That begs the question of why the government isn’t issuing debt as long-term as it can, Trennert says. After all, some companies are looking at issuing 100-year bonds to lock in these low interest rates.
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Trennert sees two possible explanations.
“First, you want the deficit to look as low as possible now, so you keep your interest expenses low,” Trennert said.
“The other reason is more frightening. Marginal buyers of debt, in particular the Chinese, have shown they don’t want to lend long-term. They want the leverage that comes with having Uncle Sam go back to them every week or two.”
That means the deficit could represent a national security issue, Trennert says. “I don’t want to be overly conspiratorial, but certainly you’re conceding some sovereignty when you fund yourself this way.”
To be sure, there are signals that the Obama administration is shifting to longer-term debt, he says. “But the magnitude of the debt is so large that you’ve only just begun.”
As we issue debt in our own currency, we can get away with issuing so much short-term debt, Trennert says. “But I don’t think it’s a prudent or sustainable approach.”
Indeed part of the reason why gold is going up while Treasury yields are plunging is that people are trying to hedge inflation and deflation at the same time, he says.
“This gives you some concern about paper currencies generally.”
As for the economy, Trennert says he’s not too pessimistic. That’s because he looks at it through the prism of the stock market, and corporate balance sheets for large multinationals are quite strong.
“There are a lot of great values here,” he said.
“You can buy world beating companies at 10 or 11 times earnings. If you marry that with a fundamental belief in our system of government, which will eventually throw the bums out, there’s a lot of relative value in the stock market.”
Not everyone is so optimistic about stocks.
“People are focused on the headwinds more than the tailwinds,” Walter Gerasimowicz, chief investment officer at Meditron Asset Management, told Associated Press.
He means that investors are more worried by weak economic data than encouraged by strong corporate profits.
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