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Are Companies Less Risky Than Countries?
For much of the 20th century, sovereign bonds, particularly US Treasuries were considered the least risky assets to own. The idea was that while corporations and other entities might default or go bust, the US , which is the largest economy in the world, will always be able to meet its debt obligations by virtue of its economic strength or, at a minimum, printing money to pay back its creditors.
However, when the Great Crisis first erupted with Round One in 2008, the Governments and Central Banks of the world chose two policies to combat debt deflation.
The first was to move private sector debts, particularly toxic mortgage backed assets and derivatives, onto the public or sovereign balance sheets. This was most common in developed countries such as the US, UK, etc.
The second policy that Central Banks and Sovereign Governments chose to enact was printing money/ providing capital injections into their respective economies in an attempt to promote economic growth.
Both of these policies put sovereign balance sheets at risk/ damaged their trustworthiness. The first policy didn’t actually involve dealing with the debts via default or restructuring. Rather, the toxic debts and derivatives were merely moved from the private sector onto the public’s balance sheet. At the same time, the second policy (monetary intervention) ballooned both public debt and fiscal deficits.
As a result of this, the “risk profile” for all asset classes has changed dramatically.
Let me give you an example.
Who do you trust more from an investment perspective: Exxon Mobil or the US?
Historically, the common thought would have been the US. The US offered a better yield and was the largest, strongest economy in the world. Also, Treasuries are backed by the full faith and credit of the US Government, which has a printing press to insure you get your money back in one for or another.
Today, the issue is far more murky. Take a look at the following numbers:
|
|
Exxon Mobil |
The US of A |
|
Debt to Market Cap/ GDP |
37% |
100% |
|
Earnings/ Receipts to Market Cap/ GDP |
8% |
15% |
|
Cash on Hand |
$7.8 billion |
$73 billion |
|
Credit Rating |
AAA |
AA+ |
|
Two year annual yield |
4.8% |
0.31% |
From a balance sheet perspective, Exxon is more attractive with less debt and a higher yield. It also has a higher credit rating and a history of increasing its payout to investors (the company has raised its dividend every year for 26 years).
In contrast, lending money to the US means receiving next to nothing in yield (0.31%). It also means you’re even more likely to see your investment lose money as Treasuries are in a bubble that will end as all bubbles do.
Other issues to consider are that the US is currently running a deficit of $1.5 trillion, sports a Debt to GDP ratio of 100% (300+% when we consider unfunded liabilities). And shows no indication of reining in these policies.
Thus, even by a quick back of the envelope analysis, we find ourselves in an environment in which a single corporation such as Exxon is actually more trustworthy (from an investment perspective) than US Treasuries.
This represents a complete reversal from the mentality that dominated investing for most of the last 80+ years. During that time, stocks were widely held to be riskier assets while Government bonds were considered safe: investment advisors would urge younger investors to invest heavily in stocks for “growth” while older investors who were closer to retirement were urged to invest in bonds, particularly Government bonds for “income”.
This is why the Greek default is so important for the financial world: if a sovereign nation’s bonds can lose 50% in value in a single day, the entire “risk spectrum” among asset classes has changed dramatically.
Folks, when we’re talking about entire countries going bust, then you KNOW that we’re in for a rough time. The reality is that the powers that be (the Federal Reserve and ECB) are fast losing control of the system. Bernanke’s already admitted he hasn’t got a clue how to solve the financial system’s problems. The Bank of England says we’re facing the greatest financial crisis in history. Even the IMF has warned that we’re heading towards a global financial meltdown.
Folks… these organizations don’t issue warnings like this just for fun. They’re the ones who are SUPPOSED to SAVE the system. Do you think they’re issuing these warnings because everything is fine?
So if you have not already taken steps to prepare for systemic failure, you NEED to do so NOW. We're literally at most a few months, and very likely just a few weeks from Europe's banks imploding.
On that note, if you’re looking for specific ideas to profit from this mess, my Surviving a Crisis Four Times Worse Than 2008 report can show you how to turn the unfolding disaster into a time of gains and profits for any investor.
Within its nine pages I explain precisely how the Second Round of the Crisis will unfold, where it will hit hardest, and the best means of profiting from it (the very investments my clients used to make triple digit returns in 2008).
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Good Investing!
Graham Summers
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firstly you are comparing bonds to equity, this is disingenious. US v XOM fundamentals have been the same 4 months ago, yet if you invested in july you lost 20% by august. so that's one. even then, your dividend yield is off, it's 2.4%. and bond yield on 2y exxon is .6%. very low quality article, which has become traditional on this blog unfortunately.
"This is why the Greek default is so important for the financial world: if a sovereign nation’s bonds can lose 50% in value in a single day, the entire “risk spectrum” among asset classes has changed dramatically."
I'm afraid you're alone with Trichet in this one; rest is fully aware that govt. defaults... existed and will keep existing. It's really nothing new. And so it happens that defaults happen in a... monetary union(because monetary union moves inflation risk to default risk).
Otherwise, the rationale stands as good or as bad as it ever did. US > Exxon because US can print; so yes, US is almost 100% safe - you'll get back all the paper.
Obviously, about the value of the paper... now that's another story ;) Here, I'd chose to be the adventurous investor and go with Exxon. It's probably less than an epsilon risker than bonds(if T bills explode, it won't be a giant like Exxon who survives), but... look at the yields.
Maybe that's why Buffet is investing in large tech multinationals.
Multinationals can shift their assets between countries, sovereign states cannot do that. With the use of wholely owned subsidiaries and royalties manipulations, countries can create economic firewalls just like IBM and other companies used this same technique for preservation of worldwide profits using this tax evasion technique in the 1980's and 90's.
The author may have hit on a valuable investing technique to be used just prior to the big collapse that may preserve assets.
Are you talking about exon bonds, or exon stock?
The fundamental problem is that the Exon bonds are denominated in dollars.
The U.S. will never technically default, it will just print to pay its bills.
When the U.S. does this it kills the real value of its bonds and ALL debt denominated in dollars.
That is why having any bond denominated in dollars with a higher rating than treasuries is bull shit.
The treasury risk is one of inflation, not of default, all dollar denominated bonds have the same disease.
Sovereign debt crisis in the 1930's...
Has there ever been a country that hasn't blown itself up?
When in the past has it ever been that government debt was ever safe to begin with? Not perception, but in reality.
Governments seem to always eventually default.
Interesting article.
For several years now Los Angeles District of Water and Power bonds have trade at a higher rating (AA) than State of Californi GeneralObligation bonds (A+).
Generally explained that essential services are safer than full faith and credit of the State. Seems to me probable that a "Utility Tax" whatever would be inposed if push came to shove but what do I know?
But a multi national conpany is not vulnerable in the same way as DWAP due to its ability to move assets around the world.
Would you rather hold bonds of ENI or of Italy? Total or France?
"governments produce *nothing* of value"
Really? atomic fission was rather impressive as all the other innovations that have come out of government funding and make your lazy ass life a bit easier.
But I digress, perhaps you could tell me precisely what physical things of "value" paper-pushing financial fucknuts produce? Got physical assets of real value? You better mother fucker. Shut it all down, then we can find out precisely who's labor is of value. Fucking BRING IT.
atomic fission? that all u got?
so your counterfactual is that, without government funding, science would not have progressed. we wouldn't have had nuclear power or the internet or anything else? problem with that thesis is, evidence doesn't support it.
the myth of science as a public good (Terence Kealey): http://youtu.be/C_PVI6V6o-4
LoP - remind me how the Govts nuclear fission has enriched us all please? ...ignoring Funkinshambles in Japan of course whose real estate will be toxic for decades going on centruies
while you're at the wonders of Govt technology for society (cough splutter) please wax lyrical about Govt weather and climate expertise, JFK's spending orgy, sorry space exploration, Ronald Regans star wankers, sorry star wars, and why not explain trains, buses, healthcare, pensions, property sector, green energy and banking (Note: it's all bankrupt and sucks from society)
Thats funny article which doesn't have any relation to reality, gov supports those corps all the time by direct tax subssidies or wars to protect them, rationale is get bigger, conquer the world, pay more in taxes(haha), but in reality it morphed to get bigger pay more kickbacks and fuck your nation taxpayers who contributed to your growth.
Exactly; governments produce *nothing* of value. Why should they be able to access credit for less cost and perceived risk than firms that own productive assets? Why should government bonds be the investment of last resort? The whole idea of government bonds being so-called 'risk-free' assets is the problem that got us into this bad situation in the first place.
First off, the corporations own the government and the governments do the bidding of the corporations. Moreover the corporations use the government to extract funding for much or the risky research and innovation that they do in order to capture more market share. Governments also fund risky research outright and then own that technology (something of great VALUE). But I digress, fucking crash the system, only then will we find out precisely the "value" of everyone's labor. The only people that create NOTHING of REAL VALUE are paper-pushing financial fucknuts.
Fine, let the corporations assume ALL the risk for the research and development of new innovation AND still be profitable. What a fucking moron.
Government has more guns. Until corps stand up to the guns, and stop withholding payroll taxes, the balance of power will remain as is. Won't happen, of course. As far as revenue streams go, though, it's hard to beat being a sovereign body.