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Investors are 'scared to debt'

A trader watches prices at his post at the New York Stock Exchange at the opening bell August 8, 2011.

JEREMY HOBSON: Now let's get some analysis with our regular Tuesday guest Juli Niemann of Smith Moore and Company. She's with us live from St. Louis. Good morning, Juli.

JULI NIEMANN: Good morning, Jeremy.

HOBSON: Well, Juli, what to make of this volatility in the markets?

NIEMANN: Well, investors are scared to debt. The mantra for institutional investors is when in doubt, you get out, so the pattern is, after a typical stock market wreck, chronically optimistic will do some bargain buying, and of course the nervous dump their riskier holdings -- we're going to see that pattern probably play out here. Up to today, then you're probably going to see some more selling pressure.

HOBSON: OK, what about big picture -- if we were to look back at this week a year from now what do you think we will say it was all about?

NIEMANN: Well, the big thing is it all goes back to the cause -- and that was debt. There was a lot of fraud -- it was Wall Street inundated the world with trillions of dollars in junk which by the way was rated AAA by Moody's, Standard & Poors, solid quality investments -- all based on real estate. But the economy was based on this real estate fraud. Europeans -- Japan -- America -- everybody has fundamental bad problems. The fraud provided the tipping point. When you bail out the banks, the problem becomes the government problem. Namely ours. So as citizens and taxpayers when these large banks fail, the recession hits. And the citizens don't spend -- they basically save. So you can stimulate all you want, but no government policy can change that. And the sheer magnitude and persistence of this slide since 2008 says it's a depression. So the citizen-consumer wants proof you're fixing things -- they're going reasonably sit on their wallets.

HOBSON: Juli, if this is a depression, like you say, what can be done?

NIEMANN: Well the Fed meets today. And the market's hoping for the miracle fix which it really couldn't offer yesterday. There's a lot of good options. They can buy more Treasuries, agency bonds, flood the financial system with cheap money as an incentive to borrow it -- hasn't worked yet, it won't work now. And the reason is consumers -- nations -- already have too much debt and can't make the interest payments. Confidence to the system returns when policy makers put on the green-eye shades and sharpen the pencils. See Greece -- he owes a million, that's a half-million now, you can never pay it back anyway. So you take a look at what you can pay if you get your house in order. Italy, your debt has 6 percent coupon, reduce it to 3 percent so you can pay. Ireland, your rates are reasonable -- instead of a 10 year debt, let's make it 20 year. Everyone cuts back wasteful spending. But, consequences are awful. The banks collapse, investment houses collapse it's going to be very, very painful. But your choice is to do it now -- three or four years of pain -- or delay it for 20 years like Japan.

HOBSON: Juli Niemann, analyst with Smith Moore and Company, thanks as always.

NEWMANN: You bet.

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