Friday, November 13, 2009

America Is An Over-Indebted, Profligate, Spoiled Nation In Decline

You can't borrow your way out of a debt problem.

That's the key message from Charles Ortel of Newport Value Partners.

The U.S. and other developed countries have lost the discipline they once had and are now trying to borrow and spend their way out from under the mountains of debt they accumulated in recent years. In the process, they're prolonging the agony and moving closer to defaulting.

The U.S., at least, won't actually default, says Ortel, but as our situation worsens, the value of credit default swaps (insurance against default) should rise. So Ortel continues to recommend CDSs to his clients.

5-year credit default swaps on U.S. soverign debt currently trade for about 25 basis points (which means it costs $25K per $10M of notional value). How does that compare to other countries or states?

  • Japan = 72 bps
  • United Kingdom = 56 bps
  • Germany = 21 bps
  • California = 177 bps
  • New York = 85 bps
And as for the stock market?

No good news there. Ortel sees the DOW eventually heading back down to the 5,000-6,000 level, below the lows of earlier this year.

What will pull the nation out of this state of decline?


Instead of rewarding government workers with ever larger salary and benefits packages, we should fire whole swaths of them. Instead of borrowing more to spend on "stimulus," we should get out of the way and let the private sector do its thing.

In the meantime, about all investors can safely own is gold.

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