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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Lee Lichterman III who wrote (35858)	12/23/1999 12:01:00 PM
From: pater tenebrarum	Read Replies (2) \| Respond to of 99985

Lee, <<''It is clear that the bulk of the extra liquidity is pooling up in bank vaults right now, awaiting withdrawals from individuals. I don't see any connection between that and a few tech stocks that are skyrocketing,' Saporta said.>> what nonsense...anyone who has paid attention in the past few weeks could see how closely the Fed's liquidity injections correlate with moves in the stock market. another way of looking at this is the amount of credit in the banking system devoted to securities holdings. it has exploded in recent weeks, at a never before seen rate. so clearly, the money IS fueling the stock market advance. just wanted to clear that up. the final proof will be available IF the Fed indeed withdraws the excess liquidity again early next year...if they do, there will be a sharp sell-off in the stock market. to the bulls out there i can consolation-wise offer my belief that they won't withdraw the liquidity, out of fear of a sudden bursting of the bubble. the conclusion is of course that the bubble may well inflate further, as it definitely won't just stand still. actually, only when the natural limit of new credit creation is reached, will the party end. (limit = corporate and household debt become so big that no additional debt can be taken on and/or existing debt can not be served anymore as interest payments become too big). now everybody will want to know when the limit is reached, and i can't answer that conclusively. however, be aware that private sector debt is at a post depression high, and growing in leaps and bounds. the sums involved are simply staggering, like for instance financial sector debt grew by 1,2 trillion dollars year-on-year (yes, trillion). the only thing even more staggering is the growth in total stock market capitalization. i continue to hold that the enormous increase in money supply growth rates has served to further distort an already distorted economy and heaped risks upon risks. consider that Fannie Mae and Freddie Mac alone have interest rate hedges put on that have produced hedging losses in the region of approximately 30 billion dollars in the derivative arena for SOMEONE. because derivatives are off-balance sheet items and are not required to be marked to market the losses haven't been reported yet. nevertheless, they exist and become bigger every day the bond market sells off and the yield curve flattens further. an enormous wave of malinvestment has gripped the economy, beginning with dotcoms burning their cash in ineffectual advertising and ending with massive overbuilding of sports stadiums across the nation (all on credit of course). i'm not going to enumerate everything, this merely serves to underscore the main point: an explosion in credit and money supply does NOT create prosperity, it creates the illusion of prosperity, by providing what looks like a free lunch today that will have to be paid dearly for later. i know, this is my usual rant, but someone has to point this out. note that i am not disparaging the fact that a great technological revolution is taking place and is here to stay. many of the tech growth stocks deserve to trade at premiums, as they represent the future and the opportunities it will offer. this doesn't change the fact that essentially the better part of the new valuation paradigm is a direct result of what is imo a dangerously loose monetary policy. the Fed erroneously believes that a lack of CPI pricing pressure validates their easy money policy - it is a grave fallacy, that has been driving the bubbles of the '20's and the Japanese bubble of the '80's as well. it will continue until the above-mentioned limit is reached, unless the Fed decides to change course before that is the case. but end it will, and the form this will take is more or less pre-ordained. in the meantime, enjoy the party! <ggg> hb