A Flood of Money
Jim Puplava, June 16, 2003
financialsense.com
This is what I believe accounts for the general bullishness that can now be viewed in the markets. Investors held on because they never really felt most of the pain of a bear market. A new bull market in housing replaced the collapsing market in stocks. Now we have both rising housing prices, rising bond prices, and a rising stock market, or three simultaneous asset bubbles instead of just one. It is the presence of these multiple asset bubbles, which have been created by an ocean of credit that is responsible for the general bullishness of investors and consumers. There is money floating everywhere. There is plenty of cheap money to buy a new home. There is even more money available to refinance one, especially one that has been owned for a few years where there is at least some equity. There is even free money available if you want to buy a car where interest rates are zero. The same applies to furniture where interest rates are zero and no down payment or payment necessary for the next two years. If you need money, there is no shortage of it and there are plenty of institutions willing to lend it to you, good credit or bad.
The general flood of money isn’t restricted to just consumers. The bond markets are ripe again with companies refinancing old and expensive debt at the lowest interest rates seen in more then three decades. Credit spreads between high and low quality debt has narrowed considerably. The markets are implying by the pricing of debt that risks are minimal.
If you are a hedge fund or speculator there is also plenty of money to be had in which to speculate. You can borrow at 1 percent and invest the money at 3-4 percent. The Fed has created many opportunities for speculation. They, in effect, have notified the markets that it is okay to speculate by saying rates will be kept low indefinitely. The green light for speculation is flashing ‘go ahead,’ we stand behind you. You now have the largest and most powerful central bank in the world going all out to create inflation in order to avoid asset deflation or the bursting of a bubble, or in the case of the U.S., multiple bubbles.
This ocean of money and credit is affecting everything in the financial markets and the economy. In the economy nothing is being created; it is simply being consumed. The financial markets are levitating at the same time with yields dropping, bond prices rising and stock markets going parabolic again. All of this is leading up to a potential detonation, as reflation will mean inflation, and higher interest rates will rise sooner rather than later. The long-term consequences of the greatest credit bubble ever to take place in history should be frightening, as the appetite for debt in the U.S. has become insatiable. I’m talking about trillions of dollars of new debt added each year. It should at least be alarming to someone that it now takes almost $5 of debt to produce $1 of GDP in the U.S.
It now appears that a temporary relief rally is underway and in full swing as the credit narcotic works its way through the financial system and then spills over into the economy, mainly in housing, and the consumption of foreign goods. What this will mean is greater debt burdens for consumers, corporations, and government, larger trade and budget deficits, and eventual defaults down the road. Debt cannot grow indefinitely and there is a limit to its creation. Eventually those that own paper will become cognizant of its evaporating value. Once it becomes obvious that the value of paper is being actively destroyed, a flight out of paper will follow. It has already begun with the dollar, which has lost 30 percent of its value. Foreign investors are dumping their dollars and looking for other forms of paper to flee to in order to protect capital. The only thing holding up the dollar and keeping it from going into a freefall is intervention by the People's Bank of China and the Bank of Japan. There will come a time when these Asian central banks view the stimulus coming from intervention too expansionary for their own economies. When that happens there will be nothing left holding up the dollar, and then the back up in interest rates begins. The ability of the gold markets to hold up in a strong equity environment may be telling of things to come in the future.
At the moment this still remains a speculators market with the Fed wanting to create inflation while trying to control all of the side effects by suppressing the real rate of interest. Therefore, asset bubbles will continue to inflate until a pin pricks the bubble or the financial markets hit an iceberg. The real question is trying to find where those icebergs exist in a sea of heavy fog. My guess is that they reside underneath the surface in derivatives or on the geopolitical side. |
