Thursday, June 14, 2007


Its A Money Supply Growth Driven Bull (Mainly)

Why is the bull so resilient?

The problem stems from this being a money supply growth driven rally, which basically moves everything up. Developed countries have been encouraging money supply growth to boost their economies for the past 5 years and we are seeing the end result. The liquidity has push prices up for everything, especially commodities.

Then you have the China and India factor as new turbo engines to the global scene. What these two countries provide is the outsourcing phenomena. Almost every big listed company has to to outsource some of their production or operations in order to save costs and improve margins. These gains are recycled back to huge cash flow in these listed companies via profits. The cash balances in corporate coffers are being recycled back as "share buybacks" which reduces the available assets meant for investments.

The China factor again kicked in as a vast group of new consumers in return, availing many new business opportunities for foreign investors to partake in growth in China economy (other than the outsourcing mode).

Reducing share supply, good corporate profits - a heady mix for bullish rallies for the stock markets globally. Naturally inflationary aspects will creep in especially with such vibrant money supply growth over the last few years. The entire global economy is on tenterhooks as the fundamentals are good for corporate profits and reducing in share supply. On the other side you have rising rates to counter inflation and enormous liquidity swishing around everywhere.

Not just money supply, but you also have the huge unlocking of fixed assets into cash via REITs over the past few years. What was just a fixed asset in your books are now tons of cash in hand. More liquidity, and a lot of it went into hedge funds and private equity. You now have private equity at levels never seen before, and they also leverage up to buy companies. Thus increasing share prices, increasing valuations across industries where activity is hot, and taking companies off the tables reducing free float.

The danger in a money supply driven rally is how much of it is "real productivity gains", and how much is just "inflationary" (more printed money chasing after limited alternatives). If it was the latter, then there is quality lacking in the bull run. We are not really producing better, just printing more money.

Even though it sounds bad, nothing really bad will happen unless they start soaking funds from the market. And they won't do that unless inflation is really posing to be a problem. Prices of goods and services are not going to come down. The one thing that is driving prices higher is labour costs because of near full employment. Hence the upward pressure for higher rates is felt by all central banks.
For that, I am leaning against companies taking themselves private as that is based on "above factors" which in itself are a bit deluding. Rising valuations and not being able to keep up with these valuations is not a sufficiently good reason to go private. It looks good on paper to go private but check the factors driving the valuations, its not that strong. They will unravel. Management are supposed to ride out the good and bad, and stop looking at the screen for share price movements in running a company well.

The real problem is too much liquidity which will inevitably create bubbles somewhere. Now a lot is vested in tricky investing solutions such as taking advantage of differentials in interest rate among currencies. Hot money flowing into the highlighted high yielding currencies is the most dangerous of all factors considered. These funds are temporary in nature, and when they play, they will swish around in the assets of that country's economic system. When even they start to trickle out, it can have severe repercussions, not only for those countries but creating a risk aversion mentality.

The bull is there, alive and kicking in stock markets, and it will have to take something external such as an imploding emerging market currency to take the steam out.

8 comments:

Pricechart said...

Marc Andreessen talks about "Bubbles on the brain".

http://blog.pmarca.com/2007/06/bubbles_on_the_.html

Pricechart said...

Today Yen Cross

AUD/JPY
Continues to move up above 102.90
00:21 GMT
CAD/JPY
Continues to move up above 114.75
00:21 GMT
CHF/JPY
Continues to move up above 98.40
00:21 GMT
EUR/JPY
Continues to move up above 163.00
02:45 GMT
GBP/JPY
Continues to move up above 241.70
00:19 GMT
NZD/JPY
Trades above 91.65
00:21 GMT
USD/JPY
Moves down from opening price level 122.69 toward 122.32
02:45 GMT

Pricechart said...

rather than kacau your blog, i think i better launch a blog "pricechart"!

VERITAS said...

Please do that.
I have been reading your comments and it is obvious you have very good knowledge of the forex markets and follow it very closely.

Salvatore_Dali said...

yes, i think thats a good idea... no need to tumpang the comment page as you have a wide range of issues to cover

Novice said...

Hi price chart, could I have the url to your blog pls. You guys are talented writers in your own rights.

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RAD said...

Dear Dali
Does your advice to shift 100
% to the market still remains at the current USD/Yen exchange rate?

If so how does that jive with your recent remarks that this bull run may last another mth at the most?

What is impending? A reasonable correction or a crash?

Regards
Radhakrisjhnan