Here’s an interesting article by Graham Summers that touches on an issue discussed earlier today – it does not take $2.7 trillion actual dollars to move the stock market up $2.7 trillion in apparent value. As a corollary, it wouldn’t take that much selling to move it back down. – Ilene
Just Who’s Buying This Rally?
Roughly 30% of US household wealth was destroyed by the collapse in housing and the 2008 Crash. Currently it stands at about $15 trillion, down % from $22 trillion at the 2007 peak. For simplicity’s sake, we’ll call this “assets.”
Now, consider that total US household debt stands at $13 trillion ($2.5 trillion in credit and $10.4 trillion in mortgage). As we noted in previous issues, consumers have only paid off about $50 billion in credit (about 2% of this). Thus we have US household equity at about $2 trillion.
Because consumers can no longer use their homes as ATMs (the home equity line of credit era is over), if we’re going to track how much US household money has flowed into the stock market, we need to focus on money market funds: the proverbial “sidelines” of the stock market.
Well, since March 2009, only $400 billion has flowed out of money market funds. Even more interesting is the fact that individual investors are pouring more money into bonds and income plays rather than stocks: for July, only $4 billion flowed into stock mutual funds compared to $28 billion for bonds.
In spite of this lack of participation, the stock market has kicked off a $2.7 trillion rally since the March lows. With only $400 billion potentially coming from individual investors. we can deduce that US households have only contributed 14% or less of the market’s gains.
Where did the other 86% ($2.3 trillion) come from?
See the Fed’s Balance Sheet, Factors Supplying Reserve Funds. This is essentially the money the Fed has put into the system via various lending windows and liquidity swaps.
As of July 30, it stood at $2.01 trillion.
It’s not hard to see what’s going on here. The Fed lends out money to Wall Street banks. Wall Street banks then use the money to recapitalize their balance sheets and push the stock market higher, creating the illusion of “recovery” and “bull markets” in an effort to get US consumers to “buy in” or begin spending again: actions that would perpetuate the myth that the bull market is back and the economy is in recovery, thereby making the Fed look like a hero.
DO NOT FORGET that Ben Bernanke is an expert on the Great Depression. As such, he will do ANYTHING to make the market and economy NOT repeat that period in history. If this includes propping up the market by lending to banks that push stocks higher with high frequency trading programs (remember this accounts for 70% of market volume), why not?
The irony here is that Ben is in fact a tragic figure. He is the high school nerd who tried to get in with the “cool kids” (Wall Street) by bowing to their every demand and whim. What Ben doesn’t realize is that Wall Street couldn’t give a damn about him and are using the money to make massive trading profits and giving themselves massive bonuses.
The tragedy lies in the fact that Wall Street not only can, but WILL let the market Crash again, thereby repeating the Great Depression’s market pattern to perfection and leaving Ben to go down in history as the guy who oversaw two mega-Crashes AND the devaluation of the dollar.
How do I know Wall Street will let the market Crash? Well, for starters the last few weeks have seen a number of large sales (transactions involving large blocks of stock).
We also saw the LARGEST options spread ever to hit the International Securities Exchange when someone sold 720,000 contracts on the S&P 500 ETF. In a nutshell, someone made a record bet than the S&P 500 would collapse sometime between August and December.
Indeed, there are 256,000 open “Put” contracts betting the S&P 500 ETF (SPY) hits December below 820. There are another 140,000 contracts betting on 800, 116,000 contracts for 750, and 104,000 contracts for 600.
Bottomline: some folks are betting BIG on the stock market collapsing before December… guess who that might be?
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Good Investing!
