Wednesday, May 10, 2006

Loans and the cost of risk

Right now, if you can fog a mirror, the bank will lend you money. The question arises, who's money is it, that they are lending you? Don't know don't care?

Its probably your retirement income fund. IRA, 401K, teachers retirement fund, CALPERS. The people managing these funds have never seen a bear market. If you were 20 years old in the last bear market, you would have have to have been born before 1948. So as far as it goes with money managers born after 1960, the bear market is a myth. "Things are different now," "That can't happen in todays world." Good solid thinking, " balls to the wall," invest fully don't leave anything in cash. There is no commission on cash held in reserve.

The only real question right now, is where are we?

There can't be more that a 1% spread between junk bonds and T-bills. This tells you that there are an awful lot of trusting fools out there right now. you would expect to see about a 5% difference between no risk and risk.

The perspective of risk is not apparent in todays market, everyone is covered with puts, calls, indexes and derivatives.

In 1929 the Federal Reserve was berated for not raising the interest rate until after the crash, it probably would have made no difference, the damage had already been done.

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