The valuation and stability of all financial markets have been enhanced by
the universal belief that US government bonds represent a risk-free interest
rate. However, the notion that a bond can be risk-free is misguided. The recently
heightened public awareness of sovereign risk and the potential for sovereign
defaults in the future (Figure 1) ultimately will force investors to recognize
that the use of a risk-free interest rate to value financial assets is flawed.
Figure 1. Sovereign Defaults Should Boom Source: Elliott Wave Financial Forecast
Nearly all asset pricing models use, directly or indirectly, a risk-free rate
to derive financial asset valuations. Although there is a growing minority
who claim that US government bonds are not risk-free, as indicated by the existence
of US credit default swaps (that are actually rising), market valuations and
sentiment to do not support this view. Investors continue to view the investment
world as it has operated during the past 30 years rather than recognize how
significantly the landscape has and continues to change because of sovereign
risk. When subprime problems first appeared, investors and central banks believed
that the problems would be contained and could be easily managed. Today, the
same complacency sets the backdrop for sovereign debt issues. When markets
embrace a risk premium for US government bonds, the effect on the pricing of
all other risk assets (stocks, bonds, real estate) will be even more severe
than what was seen in the fall of 2008.
Continental Capital Advisors, LLC was formed to offset the destruction of
wealth caused by the global devaluation of currencies by central banks. The
name Continental Capital symbolizes the 1775 US Currency, "the Continental",
which was backed by nothing and quickly became devalued.
Disclaimer: The above is a matter of opinion and is not intended as
investment advice. Comments within the text should not be construed as specific
recommendations to buy or sell securities. Individuals should consult with
their broker and personal financial advisors before engaging in any trading
activities. Certain statements included herein may constitute "forward-looking
statements" with the meaning of certain securities legislative measures. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements
of the above mentioned companies, and / or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Any action taken as a result of
reading this is solely the responsibility of the reader.
Continental Capital Advisors, LLC was formed to offset the destruction of
wealth caused by the global devaluation of currencies by central banks. The
name Continental Capital symbolizes the 1775 US Currency, "the Continental",
which was backed by nothing and quickly became devalued.
Disclaimer: The above is a matter of opinion and is not intended as
investment advice. Comments within the text should not be construed as specific
recommendations to buy or sell securities. Individuals should consult with
their broker and personal financial advisors before engaging in any trading
activities. Certain statements included herein may constitute "forward-looking
statements" with the meaning of certain securities legislative measures. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements
of the above mentioned companies, and / or industry results, to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Any action taken as a result of
reading this is solely the responsibility of the reader.
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