Dan M <[EMAIL PROTECTED]>
> The AA
> rated paper didn't have their interest rates drop (which is what happens
> when more people want to buy those bonds); they held steady.
So there was not more commercial paper lending to AA companies. Money flowed
out of the riskier companies and to other places, possibly T-bills and bank
deposits.
> The A paper price rose precipitously. The one bond that went up (lower
> yield) was the Fed note.) This indicates that people are not switching
> their desired targets for purchase from one company to another, it's an
> indication that money is being pulled out of the commercial paper market.
Yes. Money flows among many possible investments. It is a complicated
system. To the extent that GE's commercial paper yielded more than other
companies, the market voted that GE was riskier than some other companies.
Investors were also less willing to lend money as short term commercial
paper. The system is complicated. I'm not sure what you are arguing about.
> What I am saying is
> that in a system where everyone acts in a purely rational market, changes to
> Honda's, GE's, Ford's, Catipiller's 1-30 day interest rates should be
> related to either a general rise in interest rates or to things that
> directly involve these companies.
Sounds reasonable, although obviously there are more factors than the ones
you list. I imagine investors make decisions based on a large number of
factors, many of which neither of us is aware of.
> But, companies that are not involved with things like credit default swaps,
> rationally, should be minimally effected by problems with credit default
> swaps.
Evidently the overall market is too complicated to be modeled so simplistically,
and there are many details that we do not know. Or perhaps you do know better
than most everyone else what the interest rates should be for lending to those
companies. Maybe you should become an investment banker and make
a fortune? Or work for one of the bond rating agencies, it shouldn't be hard
to do better than all those "experts" after they so badly bungled their ratings
of MBS's and various corporate bonds.
> That's irrational, but lotsa folks bought into that before the bubble burst.
Lotsa folks make lots of errors. Human nature, it would seem.
> Now, since the market is efficient, I cannot predict when the bubble would
> burst, but I know investing in a company with no business plan to make money
> ever ever ever is not a good idea.
Yup. Then you could sell that company's stock short. Except that our wonderful
politicians decided that you could not.
> When GE pays a 1.5% premium on a 1 day note, investors are saying they are
> seeing a much higher risk for GE not being able to pay the note the next
> day.
No. "investors" are saying that given all the places where they can put their
money, GE has to pay a certain interest rate to get a certain amount of that
money.
> I
> think the jump in the spread to 400 basis points from about 40 basis points
> in a weak between AA and A short term paper is a measure of panic.
I think that is a statement without a practical use. It would be useful to know
what the interest rate should be. But no one knows for sure. I think it is
likely
that interest rates were excessively loose for years, and now the market is
moving to tighten up to a more prudent level. Any student of market history
knows that market changes are often abrupt.
> But, let's assume that it is fully rational. That means that about 2% to 3%
> of the companies that have A 30 day paper should default on that paper in
> the next month (it's less than 3.5% due to the premium people have always
> paid for low risk).
Or possibly the market is more complicated than your model predicts. Or
maybe you are right. If so, you should be able to make a lot of money
by consistently outguessing the market.
> Is this what you are arguing, that there is a very good chance that a
> significant fraction of non-financial companies will be in default in a
> month?
No.
_______________________________________________
http://www.mccmedia.com/mailman/listinfo/brin-l
