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Strategies & Market Trends : MDA - Market Direction Analysis

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To: jmootx who wrote (50393)	5/11/2000 7:50:00 PM
From: patron_anejo_por_favor	Read Replies (2) of 99985

<<I keep hearing that there is this hidden mysterious force called "liquidity" or cash that is lined up on the sidelines ready to go.>> I think the myth of ample "sideline" liquidity is about to be exposed. Much of the "cash" produced by selling in the April downdraft went to reduce margin indebtedness. Some went to pay taxes. In all likelihood, the remainder went to service the overwhelming personal indebtedness of the average American. Mutual fund cash positions, as reported in the IBD and elsewhere remain at or near record low levels (i.e, <4%). The progressively narrow advance in the stock markets since the spring of '98 was the first clue that liquidity was vanishing. In late March and early April, we saw increasingly rapid rotation between the Nasdaq Comp and the Dow/S&P. That was a marker that liquidity was getting critically thin (not enough liquidity available to raise more than a relative handful of stocks at any given time). The near record SWAP spreads in the bond markets is another indication (and the spreads remain above 130bp's, still extreme even after the market correction). The traditional solution for the liquidity drought we now have is central bank intervention by lowering interest rates. Regrettably, that is no longer an option because the Fed waited too long to RAISE rates and inflation is now here. The Fed has painted itself into a corner. If they reduce rates, they would face rampant inflation. If they raise rates, they will tank the equity and real estate markets. As inflation kills all pocketbooks, the more equitable route to go is "controlled deflation"...but that is a very dicey proposition when things have gotten this far out of hand. In summary: There IS no excess liquidity on the sidelines; those that have it ain't buying, and those who would buy don't have it. We are reliving the Japan economic experience of 1990. As the twin bubbles (real estate and equities) unwind, expect it to get worse, much worse.

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