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Strategies & Market Trends : John Pitera's Market Laboratory
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To: Poet who wrote (8322)9/25/2007 11:13:10 PM
From: Hawkmoon  Read Replies (1) of 33421
 
Why, given the subprime fiasco and the growing amount of foreclosures, are the interest rates on bank CD's and MM funds so low?

Why indeed.. Funny.. was in NYC this weekend and picked up a copy of Conde Nast Portfolio magazine. They had an article called "Little Red House on the Prairie" that addressed exactly that issue. It's something that I have been addressing in previous posts on SI, but they summed it up very nicely...

It's called.. "Vendor Financing".

The Chinese, Japanese, and even the Europeans, have been holding on to US $$$$ because they need our markets to support their economic growth. They are selling to us, and parking the proceeds in US T-bills in order to avoid repatrioting the money back to their own countries. And they lack any other attractive location to put that money.

That's the "dirty little secret".. When you compare the trade deficit to the actual quantity of US T-Bonds available for public trading, that doesn't leave those "vendors" much to work with as they try and "park" their earnings in US government debt. And considering demand for US govt debt is outstripping supply since the last thing they want to do is dump USD and put even MORE upward pressure on their own currencies.

Now then.. the question is what they will do should the American consumer hunker down so heavily that descretionary spending withers and decreases their earnings? Probably not much.. Certainly China has a problem since approx 200 million Chinese are directly or indirectly dependent upon the US consumer.

Hawk
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