Periodic Conundrums Tolerable; Willful Distortions Embody Risk

This article was last updated on May 19, 2022

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Conundrums in capital market valuation are tolerable. However, willful distortions (a temptation particularly in long government bonds due to their role in mortgage markets and with chronic deficits) embody risks to a wide range of capital market pricing. In Japan, artificially low government bond yields have adversely affected small company financing.
Willful manipulation in the 20th century to 1945 in Germany has resulted in a still stunted public financing small company market. Even as Libor rates return to normal and junk bond yields drop, over 2010-11 a return of 10 Year U.S. Treasury Note yields back into 4-5% trading ranges would reflect normalized spreads over imputed targets of inflation of 2%. Markets are likely to be highly sensitive to quality (strong balance sheets, strong operations and unique products/services). Equity market recovery now needs being benchmarked off distortion free long government bond yields developing.

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