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Risk Factors You Should Know


When and if investors ever decide to reduce risk the game of musical chairs is up.


I never tell people to short stocks, preferring to talk about risk. Here are a few points to keep in mind:

  • Total Household debt relative to disposable personal income is 125%, an all-time high by a lot. The fifty year average is 73%.

  • Bulls say that disposable income has been replaced by capital gains. But one only "earns" capital gains if the stock market and housing prices continue to rise. The Fed tells us that never before has the consumer had a higher net worth; again, this is totally dependent on asset prices. Bennet Sedacca has discussed this point at length.

  • There is some talk of not extending the capital gains tax cuts past 2008. This is not in the market and if Congress decides to not extend this would extract a great deal of liquidity from the system and make the Fed's job much more difficult.

  • Is it any wonder the Fed is "targeting asset prices." This is a significant source of leverage: our economy is extremely exposed to falling asset prices. No wonder Boom Boom has threatened to "drop dollars from helicopters."

  • Foreign holdings of U.S. total credit (an all-time high of $40 trillion) is now 14%, an all-time high by a lot. The fifty year average is 5%.

  • The U.S. is particularly dependent on foreigners to supply capital. This is a function of globalization and the amount of coordinated liquidity injection from central banks, who by the way, are themselves buying more risky assets than ever before. The level of government intervention in markets is staggering in my mind. But the intervention is less and less effective by the Fed and more dependent on foreign central banks to be accomodating to us. Our destiny is in their hands. People tell me not to worry about that. OK, sure.

  • And finally, total credit market debt relative to GDP is a staggering 315%. This at a time when Congress is set yet again to raise the debt limit.

As risk increases it is necessary to continue that increase. When and if investors ever decide to reduce risk the game of musical chairs is up.

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No positions in stocks mentioned.

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