Too Many Par Claims versus Sub-Par Assets


The world is a maze of debt.  Debts layered on debts.

The Earth and its productivity is roughly the same or better than prior years.  What is the problem with the economy then?

The problem is this: there are entities that made bad loans in the past that expect to be paid back in full.  They assumed the future would be far better than it turned out to be.  There is no way that the loans will be paid back in full.  The solution is paying back at a discount, whether through compromise or insolvency.

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Wait. Many of the lenders are leveraged as well, and can’t take significant losses.  Paying back at a discount will bankrupt a number of banks, which will in turn bollix the economy.

So, we have to go slow?  Does this bring us back to the problem of how one eats an elephant?  “One bite at a time.”  That is the method of Japan, leaving an over-indebted government, and reasonably indebted private sector.  But it took two decades.

Whether it is in the Euro-zone, China, or America, it would be better to let entities fail, and deal with the mess.  Yes, GDP will drop a lot, but it will rocket out of the troubles 2-3 years out, the way that Eastern Europe did post-Warsaw Pact.

Ending  the economic malaise means ending the debt overhang.  Where is the government, or set of governments willing to attack this and reduce debts economy-wide?  I know it is a tough prescription, but economies don’t work well when they are overindebted.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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