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If this is a bubble, what fuels it?

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Sat May 17th, 2014 at 03:17:26 AM EST
The financial sector is in no lack of liquidity.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat May 17th, 2014 at 05:00:47 AM EST
[ Parent ]
In Europe interbank liquidity is again tight, though.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 03:49:51 AM EST
[ Parent ]
Sterilisation..?

But the above chart concerns the US.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon May 19th, 2014 at 03:55:47 AM EST
[ Parent ]
Yes, and early LTRO repayments to "signal health to the market".

And yes.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 04:07:58 AM EST
[ Parent ]
QE money has to go somewhere. And besides, bubble addicts love the game.
by das monde on Sat May 17th, 2014 at 05:01:33 AM EST
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The US is in a liquidity trap. There is no shortage of capital or lending capacity, but there is a shortage of  borrowers who are both creditworthy and willing. In such a situation those with cash know that others with cash will be putting money into the stock market, so they do also. This works until it doesn't.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun May 18th, 2014 at 05:20:32 PM EST
[ Parent ]
See also: At big-ticket dinners, a blunt Bernanke sounds theme of low rates (May 17, 2014)
At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed's main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke's lifetime, one source who had spoken to the guest said.


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sun May 18th, 2014 at 06:05:27 PM EST
[ Parent ]
So the solution is to pump money to borrowers, so to disguise but make the apartheid between Financial PeopleTM and Working/Non-Working Poor deeper?

Piketty pinpointed the core capitalism predicament better than Keynes. On one hand, the QEs are there to provide usual big financial returns without bothering with productive economy circulation. On the other hand, the Financial Power is at its peak, and governments, institutions are working hard to maintain it. Or to converting it to ages-long social domination.

Be it with generally misguided interpretations, check the topics at Zero Hedge:

World's unsold cars stockpile in thousands

Meat and seafood becoming scarce, prices are to rise

Fukushima seawater radiation rises to new all time high

College graduates with debt "worth less" than high school grads, will get worse

There is no future as we know it.

by das monde on Mon May 19th, 2014 at 02:11:10 AM EST
[ Parent ]
Jalopnik: That Zero Hedge Article On Unsold Cars Is Bullshit (May 18, 2014)
It is an admittedly appealing idea to think that automakers, unable to sell cars, are just wildly producing them and then dumping them around the world in an endless cycle of mass production hysteria. So much of the modern economy seems senseless and inexplicable, which is why an article like this seems to give some credence to the feeling many of us have inside that something is terribly wrong.

The visuals are strong, the headline is clear, and you almost don't have to read the article to viscerally understand the problem. I, more than anyone, get the appeal of this story because it seems to largely rip off an article I wrote -- including the images and headline -- more than five years ago (which itself was largely a rehash of a Guardian article).

...

There's even an update in the post where either the author, Vincent Lewis, or Tyler Durden -- ZH's mysterious author -- realized there was a fault in their knowledge and they say this:

UPDATE: Currently May 16th, 2014, all of these cars at the Nissan Sunderland test track have disappeared? Now I don't believe they have all suddenly been sold. I would guess they may have been taken away and recycled to make room for the next vast production run.
Well, if you don't want to believe that in five years they couldn't sell a few hundred cars at a price above the recycle rate then I can't help you, because you must be so paranoid you think that Fudgie The Whale is the secret symbol of the illuminati.


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 03:38:22 AM EST
[ Parent ]
That Zero Hedge Article On Unsold Cars Is Bullshit
Bottom line: This is paranoid nonsense that has the tiniest bits of reality inside of it, like a giant turd sprinkled with truffles. My advice? Don't swallow it.

Very often the case with Zero Hedge.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon May 19th, 2014 at 03:53:59 AM EST
[ Parent ]
(h/t Drew, BTW)

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 04:08:58 AM EST
[ Parent ]
With the Fed buying what are probably CDOs and buying them at face value, or par, they are effectively trading new high powered money for trash at 50 cents on the dollar. So the TBTF entity gets cash for its illiquid asset. If, as likely, the operation is a repo the Fed, in theory, could demand that the recipient buy the 'asset' back. This probably doesn't constrain the recipient of QE because the exercise of that right by the Fed on any significant scale could bankrupt the bank, and, in any case, the whole point of the exercise was to help the financial sector.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 19th, 2014 at 12:33:14 PM EST
[ Parent ]
Private lending isn't going into housing, in any case:

U.S. private lenders not ready to replace Fannie, Freddie: regulator | Reuters

(Reuters) - The regulator of government-controlled mortgage finance firms Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) said on Sunday he would not oppose them having a smaller presence in the market but private capital had to be ready to take over first.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon May 19th, 2014 at 02:30:21 AM EST
[ Parent ]
Part of the free capital is creating a start-up bubble.  Such as this:

San Francisco-startup and bane of taxi drivers Uber is in talks for funding that would value the startup at an astronomical $10bn.

Uber's Business Plan is not only, frankly, insane it is illegal.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon May 19th, 2014 at 01:19:34 PM EST
[ Parent ]
When the regulators turn a blind eye to the activities of the rich, only scams that are not big enough is illegal.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Mon May 19th, 2014 at 03:06:18 PM EST
[ Parent ]
...They're a cab company with an app. That is a viable business model. It's not a billion dollar one.
by Thomas on Wed May 28th, 2014 at 01:43:42 AM EST
[ Parent ]
It's right there in the blockquote: investorsspeculators are buying shares on broker credit.

So no, obviously it's not QE money.

Bubbles are self-fuelled because the expectation of returns encourages speculators to buy shares on credit, and it encourages the brokers to lend for share purchases. After all, if share prices will go up, the loan pays itself, doesn't it? And the credit purchases are share purchases, so they increase share prices and so the positive feedback loop.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 04:07:15 AM EST
[ Parent ]
What reserves (if any) must brokers have to lend on?
by afew (afew(a in a circle)eurotrib_dot_com) on Mon May 19th, 2014 at 04:27:16 AM EST
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I'm not sure, that's probably an SEC regulation unless the broker is a bank.

But I'm guessing not much. And brokerage margin lending is probably a big contributor to the "shadow banking system".

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 04:46:10 AM EST
[ Parent ]
I do not recall that this question was dealt with in my Money and Banking course. From an SEC PDF: SEC Financial Responsibility Rules

SEC amended the net capital rule (Rule 15c3-1) in 1975 to establish uniform net capital standards for brokers and dealers' registered with SEC under Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act). With few exceptions, all broker-dealers registered with SEC must comply with this liquidity standard.' The primary purpose of this rule is to ensure that registered broker-dealers maintain at all times sufficient liquid assets to (1) promptly satisfy their liabilities-the claims of customers, creditors, and other broker-dealers; and (2) to provide a cushion of liquid assets in excess of liabilities to cover potential market, credit, and other risks if they should be required to liquidate. The rule achieves its purpose by prescribing a liquidity test that requires a broker-dealer to maintain the greater of a specified minimum dollar amount or specified percentage of net capital in relation to either aggregate indebtedness (generally all liabilities of the broker-dealer) or customer-related receivables (money owed to the broker-dealer by customers) as computed by the reserve requirements of Rule 15c3-3. The net capital rule thus enhances investor/customer& confidence in the financial integrity of broker-dealers and the securities market. The net capital rule applies only to the registered broker-dealer and does not apply to the broker-dealer's holding company or unregulated subsidiaries or affiliates.'

To me it is difficult to see which of the SEC and Federal Reserve is worst at prudential regulation.


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 19th, 2014 at 11:02:13 AM EST
[ Parent ]
ensure that registered broker-dealers maintain at all times sufficient liquid assets to (1) promptly satisfy their liabilities-the claims of customers, creditors, and other broker-dealers; and (2) to provide a cushion of liquid assets in excess of liabilities to cover potential market, credit, and other risks if they should be required to liquidate
If this is really "in excess of liabilities" then the bigger the margin lending bubble the bigger the drain in liquidity in the system at large.

IMHO, and somewhat counterintuitively, insisting on liquidity buffers actually decreases systemic liquidity, as it ties down a large fraction of the available liquidity.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 11:43:48 AM EST
[ Parent ]
Well, my 'intuition' was completely useless trying to imagine the effects of that statement.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 19th, 2014 at 12:37:17 PM EST
[ Parent ]
investorsspeculators are buying shares on broker credit

Is this something new, like the result of some deregulation?

What I mean is that there was the dot-com bubble when worthless stocks were sold with "knowledge economy" mumbo-jumbo; then there was the subprime mortgage/derivates bubble when mortgages with little hope of repayment were re-packaged to be sold as the safest investment around; what's the biggest Ponzi scheme this time?

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon May 19th, 2014 at 01:19:12 PM EST
[ Parent ]
Is this something new ...

Not really.  Mr. Market has once again decided This Time It's Different©.  In my view because corporations, etc., are sitting on whacking great Piles O' Cash and haven't a clue what to do with it.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon May 19th, 2014 at 01:23:38 PM EST
[ Parent ]
Mr. Market has once again decided This Time It's Different©

But if it's not broker credit, then what's the trick this time? What new story they tell investors to convince them that This Time It's Different? What's the biggest latest "financial innovation"?

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon May 19th, 2014 at 02:21:15 PM EST
[ Parent ]
I can't believe anyone thinks It's Different This Time. What they think is that there's a heap of money to be made in this bull run, and they're smart enough to get out in time.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon May 19th, 2014 at 02:38:38 PM EST
[ Parent ]
speculators are buying shares on broker credit

Is this something new, like the result of some deregulation?

You should really read John K. Galbraith's The Great Crash, 1929. It's a short little book.

I mean, blowing bubbles is what "market participants" do...

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 06:38:10 PM EST
[ Parent ]
From the chapter The Twilight of Illusion in The Great Crash:

(Sorry about the readability, there still seems to be a 600px limit on image height...)

by afew (afew(a in a circle)eurotrib_dot_com) on Tue May 20th, 2014 at 02:17:56 AM EST
[ Parent ]
No need to posit financial innovation or new Ponzi schemes in order to explain a margin-loan-fuelled bubble.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue May 20th, 2014 at 06:08:28 AM EST
[ Parent ]

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