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Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: Sam Citron who wrote (9482)	11/26/1997 11:09:00 AM
From: Mike M2	Respond to of 18056

Sam, I started humming the national anthem while reading your note. I am impressed with America's ability to entice foreigners to fund our perenial current account deficits. I agree with Mohan's comments to you,great minds think a like. Sam I would agree that the mkt is bigger than the Fed. The other factors I wanted to touch on is why our interest rates are so low despite our low savings rate. The Japanese lowered interest rates in an attempt to stimulate their economy what happened is speculators borrow cheap in Japan to buy higher yielding US debt-this is known as the carry trade. The result was the creation of extra demand for US bonds causing interest rates to drop. This gives an additional boost for stocks because people seek higher returns in the stk mkt. Financial deregulation has allowed credit growth to grow from non bank sources through the securitiztion of loans. One major factor which Wall ST seems to ignore is the fact that the biggest bubbles occured in an environment of low PRICE inflation while the monetary inflation is ignored - the roaring 20's bull mkt and the Japanese bubble economy of the 80's. Monetary inflation can manifest itself in the price of real assets and goods or the financial mkts. More later Mike

To: Sam Citron who wrote (9482)	11/26/1997 11:11:00 AM
From: Cynic 2005	Read Replies (3) \| Respond to of 18056

People tend to save for their retirement and there are alot of these savings sloshing around the system providing liquidity. It's not the Fed. It's primarily market forces. Market forces are much bigger than the Fed. Sam, I think your theory is based on the naive assumption that the personal savings are the root cause of this stock boom. Liquidity is the key forece behind this boom. I hope you agree with me on this. The liquidity coming from MF inflow is peanuts compared to foreign money inflows (see the Only the Best: ... thread for a note by tekgk on this.) Also, what is out there is of much bigger proporation than what is coming in everymonth. Another area where the liquidity is coming from is leverage. A few weeks ago an article in WSJ mentined about a trader at Soro's hedge fund who is controlling $57 bln positions with an equity of $2.7 bln. Compare this to annualize fund-inflows (last 2 years) of about $240 million. You get the idea. The fact that the interest rates are low, helps increase this leverage. Why not? Even a 10% return in the market is appealing when you can borrow at much lower than that rate. This is why even if the markets are bigger than the Feds, Feds have a lot of influence in creating the asset bubble. When the fundamentals take a turn for the worse (i.e. at which time the spins like "company specific" factors won't cut it) it will be too late for people to turn around and sell these leveraged positions too quickly. No matter what the little guy adds to his funds every month, this leverage will be an eventual market killer. And drying of foreign funds will not help the situation either. If I were to believe, as you do, that the market as a whole is 40% overvalued, I would be heavily short stock indexes. Is this your position? Yes! -Mohan