Drowning in a Sea of Liquidity
US is good at creating credit; bad at paying it back.
Everything looks great - and yet you still have that uneasy feeling. When this happens, it's always good to check your premises
I think we can all agree that the markets, from stocks to bonds to art work, are riding on a sea of liquidity, which can come from 2 sources: Income or borrowing.
Real disposable income has actually fallen over the last 5 years. With a negative savings rate and a gigantic trade deficit, it's no secret that Americans are borrowing in order to consume.
Further evidence of this fact can be seen in a total GDP credit of 3.6 times (the next highest was 2.9, in 1929; it's averaged out at approximately 1.5 times over the last decades). We also have the lowest equity levels in homes ever, the highest percentage of disposable income going to service debt ever, government budget deficits of over $300 billion, and a public debt figure approaching $9 trillion (not counting the $500 billion in war costs so far - and not including the $45 trillion in unfunded liabilities from Medicare and Social Security).
Few people really understand the ramifications of this, or the process by which the bureaucrats in Washington compound the harm all this debt will cause by creating ever more of it.
A $1 billion REPO by the Fed doesn't seem like much - until you check your premises. The Fed just did a $1.3 billion dollar coupon pass, which is like a permanent REPO; it calls up JPMorgan (JPM) and purchases its bonds with credit - credit created from nothing. They just tell JPMorgan: "We owe you money."
JPMorgan now has funds (credit) it can lend out. But because of margin requirements, it can lend out much more than $1.3 billion. In fact, it lends out about 20 times that amount.
So let's say they call up 20 regional banks and let them borrow $1 billion each. In turn, each regional bank then lends out $5 billion to various mortgage borrowers. These borrowers refinance their houses - and spend the extra cash while the equity in their homes drops.
Click Here to Purchase John Succo's "A Derivatives Primer: Options, Futures and Structures"
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter