Investors Should Be Prepared to Face Financial Oppression

That’s the conclusion of a new report by Morgan Stanley analyst Arnaud Mares.

And what, you may ask, is financial oppression? Speaking from the perspective of investors in sovereign debt, Mares defines it as “imposing on creditors real rates of return that are negative or artificially low.” Which doesn’t require outright default. Instead, it

[C]an take other forms: repaying debt in devalued money (e.g., through unanticipated inflation), taxation or regulatory incentives on institutions to purchase government debt at uneconomic prices.

Mares sees sovereign creditors as tempting targets when over-indebted governments decide which of their many fiscal promises they can’t keep.  After all, elderly pensioners cast more votes than coupon-clipping bond holders. And he thinks current low yields provide little protection against that threat.

His piece is definitely worth a read if you want to consider a bearish view on U.S. and European sovereign credit.

3 thoughts on “Investors Should Be Prepared to Face Financial Oppression”

  1. I remember MS being bullish at the top of the Tech & Telecom bubble (remember the “Queen of the Internet?”). I would expect them to be bearish at the bottom.

  2. This is a timely post; a whole new world of investing is upon us as the EUR/JPY and the AUD/JPY sold off on August 10, 2010 and then again on August 19, and August 20.

    Also Peak Credit Likely occurred on August 27, 2010.

    I have to agree that investors should be prepared to face “financial oppression” (in addition, people should be prepared to face austerity measures) as a credible threat, against which, current yields, provide little protection.

    For my financial protection, I am invested in gold bullion. Silver, $SILVER, said to be the poor man’s gold, has soared; breaking out just recently

    As I look at the chart of the 20 to 30 year US Government Bonds, TLT, I see just part of the massive amount of total debt, BND; which closed lower August 27, 2010 at 82.38 which is below its August 24, 2010 high of 82.80.

    I believe investors have blown the debt bubble so large, there is going to be a mad rush to the exit doors to sell, where there will not be enough buyers for sellers, resulting in a liquidity evaporation, and a liquidity crisis.

    The ongoing Yahoo Finance chart of Japan, EWJ, Mexico, EWW, Europe, FEZ, Asia, DNH, and the US shares, VTI ….. EWJ, EWW, FEZ, DNH, VTI shows the effect of debt deflation stemming from the sale of EUR/JPY and the AUD/JPY beginning August 10, 2010 and then again August 19, and 20, 2010.

    The interest rate on the 30 Year US Government Bond, ^TYX, closed up at 3.70.

    The interest rate on the 10 Year US Government Note, ^TNX, closed up at 2.65.

    Higher interest rates mean less money, higher food prices, stock and bond deflation, economic contraction, political devolution and global austerity.

    The 300% inverse of the 30 Year US Government Bond, TMV, closed up 35.02.

    Those invested in Junk Bonds, JNK, and Emerging market bonds, EMB, have already started to jump ship to avoid financial pain.

    I believe that soon, out of the chaos of “financial oppression” cited by the Morgan Stanley author, that here in the US a Financial Regulator will be announced who will oversee lending and credit, as well as money market and brokerage accounts. He will be what I call a credit boss or credit seignior who funds economic operations with an emphasis on seeing that the strategic needs of the country are met and that monies for food stamps keeps flowing. I believe the government will become the first, last and only provider of liquidity and money.

    I believe that here in the US, the Financial Regulator will exercise Discretionary Governance, and announce a Home Leasing Program administered by the banks on their REO properties and those of Freddie Mac, Fannie Mae and the US Federal Reserve. Mortgage lending and securitization of loans will cease, and leasing of homes will be a public private partnership cooperative endeavor. Companies that have created and serviced mortgage-backed securities, such as Anworth Mortgage Asset Corporation, ANH, and Annaly Capital Management, NLY, will quickly disappear from the economic landscape, as mortgage bond funds such as Goldman Sachs Mortgage Bonds, GSUAX, tumble in value.

    And I envision that in Europe, a continuing fall in the EUR/JPY from today’s 107.5 to 108.75, will result in further stock deflation, seen in the ETF, FEZ, falling below 33.25. Then a liquidity crisis will emerge, where there will not be enough buyers for sellers of stocks as well as bonds, causing small business failures and banks to become sorely decapitalized, resulting in the president of the ECB arising to be an “Eurozone credit seignior” and provider of liquidity to Europe.

    I also believe that “framework agreements” will be announced in Europe providing for fiscal federalism, giving a whole new meaning to the term European Economic Governance. Yes, I foresee a greater fiscal union. Fiscal federalism will result in the Eurozone evolving into a region of global governance where national sovereignty will be a concept of a bygone era

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