... and why it can't continue ...
(snip)"So, what has been driving U.S. stock prices higher? Massive buybacks of their own stocks by corporations and massive amounts of corporate stocks being purchased by private equity syndicates in taking publicly-traded companies private. And what has been driving this massive "de-equitization"? Cheap credit. Chart 4 shows that non-financial corporate borrowing has picked up in absolute terms and in relative terms - relative to capital spending"(snip)
(snip)"But now, credit to fund de-equitization is getting more expensive. Since June 12, the yield spread between high yield (aka junk) bonds and 10-year U.S. Treasury securities has increased by 150 basis points (see Chart 5). Even with this recent widening, corporate credit-risk spreads still are relatively low (see Chart 6). But should they continue to widen, this de-equitization factor that has been driving up stock prices will wane."(snip)
(snip)"Would a significant slowdown in de-equitization have a negative impact on U.S. aggregate demand? You bet it would. As I argued in my latest The Econtrarian (Wealth Effect or Borrowing/Asset Sales Effect?), households have been net sellers of corporate equities (to corporations and private equity entities), the proceeds of which have been helping to fund household deficits. With the mortgage credit market tightening, a significant slowing in de-equitization would be another nail in the coffin of household spending, which accounts for 75% of real GDP. Perhaps the feeble 0.6% quarter-to-quarter annualized growth in real household expenditures (sum of real personal consumption and residential investment expenditures) in Q2:2007 - the weakest since Q1:1995 - is the new reality (see Chart 7)."(snip)
Besides the issue of borrowed (foreign) money being used to buy US stock shares, IMHO a much more significant point is raised in this article. For the first time, the author shows proof explaining how US consumers who were first cut off from extracting refi / home equity loan cash by the end of increasing real estate prices and the tightening of lending standards, and who then maxxed out their credit cards, have still been able to keep paying their bills and avoid bankruptcy. The answer seems to be that US consumers have been selling off their stock shares at a record breaking rate and spending the proceeds to keep their 'heads above water'. However, this selloff did NOT cause the US stock markets to decline because US corporations and private equity funds / hedge funds stood ready to buy up those shares using borrowed (foreign) money.
However, now that the borrowed (foreign) money is becoming much more expensive (and subject to much more risk of currency exchange rate losses), corporate / private equity fund / hedge fund share buying using borrowed (foreign) money is likely to come to an abrupt halt. Lots of sellers and few buyers with actual money to invest can mean only one thing ...



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