Stock And Bond Markets: Why Are They Rising?

The Mogambo Guru - Wed 25 Jul, 2007

The stock market may be going up because there is a huge, towering overhang of short interest, and if there is one trick that the sharks of Wall Street reliably pull to eat their fill when short interest expands like this, it is by suddenly running the market sharply up and squeezing the shorts, who buy in a panic to cover their enormous short positions and to keep from losing more money if the stock price continues to rise, making prices go up even more, spooking more shorts, who then buy to cover, making prices go up some more, spooking more shorts. And a lot of buying is resulting from lots of foreign investment money coming here, too...

Why are the stock markets and bond markets rising? For
the only reason that there is: Because there are more
buyers than sellers! Hahahaha!

Okay, I am sorry about laughing, but if I may be so bold
as to make a suggestion, perhaps your question would
have been better phrased as, "Where are the buyers
getting the money to buy all of this stock and bond
madness and act like a bunch of morons?"

If that had been your question, I could have saved us
both a lot of time by merely sending you to
Online.wsj.com, which reports that, "'Margin Debt' Hits
Record $353 Billion on NYSE", which means that,
"Investors are borrowing record sums of money to finance
trades on the New York Stock Exchange."

How much money? The Journal continues, "So-called margin
debt, a broad measure of leverage, jumped 11% to $353
billion at the NYSE in May, up from nearly $318 billion
in April."
The news that margin debt increased 11% in one month, to
a new record, so surprised and alarmed me that I
accidentally swallowed my tongue in horror! But,
thankfully, it turned out to be okay, since it was soon
forced back up by my reflexively puking up blood at the
sheer horror of so much speculative debt.

And broker-dealers suddenly find themselves with more
money, too, as from Jim Grant's Interest Rate Observer
we learn that thanks to the new regulatory system for
broker-dealers called Consolidated Supervised Entity,
"the broker-dealers (in voluntary fashion) are
implementing the risk-based capital rules known in the
trade as Basel II.

"The liberating feature of Basel II", he continues, "is
that the financial institutions to which it applies may
hold more assets per dollar of equity capital than they
previously could - provided that a ratings agency judges
the assets to be top-flight."

By this time I am so bored by one more story of one more
bunch of sleazy operators in cahoots with corrupt
regulatory supervision that I am thinking "Yadda yadda
yadda" and trying to stick my pencil in the ceiling just
to keep from nodding off. I was yanked back to cruel
reality when Mr. Grant said. "Specifically, under Basel
II, a broker-dealer must set aside just 56 cents in
capital to hold US$100 of triple-A-rated
securitisations." Yow! Fifty-six lousy cents?

Shocked, I am too, too, too nonplussed to comment, so I
turn to Junior Mogambo Ranger (JMR) Phil S., who says
that only putting up 56 cents to hold $100 in assets
seems a bit much, as "That is 1/18th of the 10% stock
margin equity required in 1929"!! Hahaha! The
exclamation points were added by me, utilising my
awesome editing powers ("If there is nobody here to stop
me by force, I can do whatever I want") to add that
essential Mogambo Stylistic Flourish (MSF) to give it
the dramatic emphasis that it truly deserves.

And the stock market may be going up because there is a
huge, towering overhang of short interest, and if there
is one trick that the sharks of Wall Street reliably
pull to eat their fill when short interest expands like
this, it is by suddenly running the market sharply up
and squeezing the shorts, who buy in a panic to cover
their enormous short positions and to keep from losing
more money if the stock price continues to rise, making
prices go up even more, spooking more shorts, who then
buy to cover, making prices go up some more, spooking
more shorts.

And a lot of buying is resulting from lots of foreign
investment money coming here, too, as an FT.com article
quotes Alan Ruskin, chief international strategist at
RBD Greenwich Capital as saying "One reason why the
dollar has responded in such a negative fashion is that
corporate bond inflows have made up half of the current
account financing in the past year."

In fact, he says, "In the 12 months to April, the US
received $509bn in corporate bond investment inflows
that helped finance the current account deficit." Half a
trillion a year!

And the market is also going up because the Plunge
Protection Team and the entire rest of the governments,
banks and financial services industry are busily
intervening in the marketplace, desperately trying to
keep stock, bond and housing prices up and rising.
And they can intervene with good effect at those times
when prices have been recently down, and the charts of
the market price start hitting the lower bound of their
up-trend channels, making technical traders get nervous
that prices will fall some more to penetrate the lower
channel, meaning that lower prices lie ahead and now is
a good time to sell!

But nowadays (just in time, every time!), the markets
suddenly turn around, bounce off of the lower bound of
the channel, which is a bullish signal, and the
technical traders launch into "buy mode"! Mission
accomplished!

But the real reason that markets are going so bizarrely
up is because excess money and credit are constantly
being created around the world, by central banks around
the world, and thus money supplies around the world are
expanding at double digit rates around the world, and
all this new money has to go somewhere, or why would
anyone borrow it in the first place?

And it is going into stock markets, and bond markets,
and housing markets and commodities markets around the
world, driving up (by bidding up) the prices of
everything. How far away from "price stability" can you
get before you just say "Ugh!"?

Until next week,

The Mogambo Guru
For The Daily Reckoning

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