Risk Returns to Nations

S&P’s downgrading of Britain’s outlook will engender concern for the nation’s AAA outlook and eventually the extent to which the bail-out can continue. In retrospect it was inevitable that something like this should happen; the Anglo-American economic block seemed to be getting free funding for its bail-out. Furthermore the absolutely wasteful and enormous governmental expenditure, which had been up in the last decade, needs some accounting for. 

There are only two government models; one is the European social model (high govt. spending and high tax) and the Anglo-American one (low govt. spending and low tax). The last decade Britain and America were both pursuing high govt. spending and low taxes, which doesn’t tie in together. In fact I welcome yesterday’s event as a way to monitor the bloated British government; it also marks my latest advocacy “Public spending must be made public”!

This in effect means that at the point of any expenditure whatsoever by any government (or government sponsored organisation or indirect funded organisation) must be published immediately (the only exception which comes to my mind is Defence and even then how much can be concealed should be debated). Public life means just that Public life and the latest scandal in Westminster, which may not in itself have immediate impact on the markets, is illustrative of the corruption and gigantic proportions which suffocate the economy and have done for the past decade. 

With the current rally, while we have consistently banged on in KK about the lack of real signals, I will again refer to the fact that cash offers in structured credit no longer make sense against underlying bond collateral performance (most specifically in hi yield and abs space).
 
If a bond rated BBB, with 0% credit enhancement and with creeping delinquency is being bought at 20 cents to the Dollar, questions need to be asked about whether there is just too much hot money out there or investors running out of cheap binary options are snapping everything up. Its a strange relationship because if the rally continues unabated from here, where does it stop.
 
Other investors who are sitting on cash, running a cold sweat waiting for bonds to get cheaper to start getting involved will begin to wonder if they have missed the boat, and add at even higher prices…. Thats where it beginns to get more interesting. Just a random thought today.