A Few Interesting Points

Highlighted notes were taken from Minyanville.

Why The Credit Bubble Lasted For Decades

  • Single household breadwinner became two household bread winners
  • Interest rates were at 18% headed to 1%
  • Internet revolution provided tremendous numbers of jobs
  • Lending standards declined
  • Housing boom provided jobs
  • Rising asset prices supported consumption

All Greenspan really did was accelerate the existing trend.

Depression vs. Deflation

Some are under the impression that deflation means depression. This is not necessarily true. The two may be measured not only in value but also in time. Imagine your stocks go nowhere for 18 years. That’s just as bad as losing 90% of your portfolio’s worth. In a sense, what Japan experienced during the last 18 years was merely a depression that, instead of stopping economic activity altogether, slowed it down heavily in lagging measure, where the nation’s currency outperformed business activity (and hence equities), thus presenting a deflationary scenario.

Secular Trends Based on Net Liquidity

Imagine that the stock market is a car moving down the road that needs fuel to keep accelerating. If the tank, in this case liquidity (or better yet net liquidity) is on ‘E’, the market will stop accelerating or possibly stall out. The chart below, while slightly confusing, simply takes all of the ‘non-equity liquid assets,’ which includes checking accounts, CDs, money funds, savings accounts, corporate, foreign, municipal and U.S. Government Bonds and subtracts debt from that. As of September 30, 2007 that number stood at $10.451 trln dollars. The problem, of course, is that household liabilities stood at $14.157 trln, leaving net liquidity at minus $3.706 trln. Why is this important? Net liquidity is what drives secular bull markets.

To see how much liquidity there is relative to market values you simply divide assets (in this case the Wilshire 5000 Equity Index: a very broad equity index valued at $15.362 trln) and one finds that there is minus 24.1% liquidity to market value. That tank isn’t only on ‘E,’ it is below ‘E.’ Also of note is that in 1953, 1974, 1980, and 1984, the gas in the tank was near 70%. Now that is a full tank. Does this mean the market can’t go higher? Of course not. It simply suggests that the marginal dollar isn’t going to be able to move it as fast. The chart below says it all.

Credit Bubble and Stock Valuations

People tend to believe that credit cycles work in sync with stock prices. In truth, however the two have almost nothing to do with each other. Credit cycles are financed by debt while corporations are evaluated by earnings. One represents real growth while the other does not. The ratio of household Debt relative to GDP is staggering (as seen in this chart). It’s actually negative for the first time since… the post-war boom. While the last major bull market lasted 20 years, the mounting amounts of debt have been rising for over 50!

Negative Lease Rates for Silver

Have you realized that just about all lease rates for silver are either at zero or negative? What implications does that hold for the market?

If you ask Antal Fekete from Gold Standard University Live, he’ll tell you that lease rates are the yields at which holders of silver are interested in leasing out their silver. Those leasing on the other side of the trade will often engage in various trading motions or even go short, selling their silver expecting to buy it back at a better price. There are times however when a rally seems imminent and they will rush to cover their short-sales. As an incentive for the lessors to except the silver they were so happily earning interest on, the traders will offer the lessors a return for taking back the metal.

Happy New Years!


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