Hi All:

It has been said repeatedly here and elsewhere that the current stockmarket expansion is being fueled almost exclusively by a loose credit policy of the Fed. Since this seems to be the case, I have two questions:

1) What is the mechanism by which this 'new money' finds its way into the hands of adverage stock purchasers (e.g. Joe & Jane Daytrader), and

2) What will happen to all that newly created credit/money once the bubble finally bursts?

Thanks for your thoughtful response.

-- Yan (no@no.no), January 20, 2000

Answers

One way is it's eaiser for John Q. to take out a second mortgage, or borrow against their stock portfolio, and use that money to buy the stock market - on MARGIN, i.e., they don't have to put up the whole stock value. Money loaned on money (house of stock value) that's inflated, to "buy" stock on leverage.

The NASDAQ decreased their margin requirements from %75 to %25.

In answer to your second question, the Banks, who everyone owes their money to, will own everything, the average investor will be wiped out.

-- Gregg (g.abbott@starting-point.com), January 20, 2000.

"What will happen to all that newly created credit/money once the bubble finally bursts?"

Most of the people borrowing this money to gamble in the stock market will get off the hook by filing bankruptcy. Then the government and the banks will attempt to recover this debt by taxing the crap out of us and raising prices for the rest of us who never played the market. Somebody is gonna have to pay. Welcome to America, where honesty and hard work will get you nowhere, but if you know how to cheat and rob your neighbors by learning how to play the game, you will be highly rewarded.

-- Hawk (flyin@high.again), January 20, 2000.

Well, for one thing, the Fed increased the money supply in anticipation of Y2K problems! But the other issue that has popped up in the recent news is that the Fed really hasn't kept pace with the growth of the economy (in terms of raising rates to match it); low rates mean more accessible money.

The other issue is easy margin lending by brokerages, and brings up comparisons with the 1929 era of stock speculation, when much of that boom was fueled by leveraged buying. Going online, I know that my broker (Schwab) has raised margin requirements for some of the higher- flying tech stocks (i.e. they require more real capital behind the purchase), but that's only one broker tagging a handful of active stocks, that's not the whole market. Consumer debt (non-market related) has also gone up dramatically in the past 10 years. The wealth effect created by the market run-up makes large-purchase items like houses more expensive (if there's one government stat I have an issue with, it's the CPI... no way inflation's that low), and when the market finally chokes, there'll be a lot of people long on debt and short on money in a world where big ticket items cost more.

And of course oil's going up too... another cost-increase. 2000 should be interesting.

-- Just (anotherbuckeye@columbus.org), January 20, 2000.

The current expantion is not being fueled by loose credit. Many the people who post here(goldbugs ect) either have the incorrect idea or are selling something.

The main push for the stock market through the 90's came in the form of 401K and IRA money comming into the market. Many companies have started 401K's where by the employee has before tax money taken out of his pay and put into an investment account. These Investment accounts are essentailly locked up for 20-30 years before they can be exercised. Example: I can exercise my 401K in 25 years without a penalty. I, like many people, are putting in up to 16% of our pay or up to $10500 per year into their respected 401k accounts. These moneys are being invested in the market(multiply that money invested by the millions of americans who can now join 401k plans instead of having company pentions) Mine are being invested in S&P500 funds, company stock.(Bond funds are an option, but I am not in them.) From this new money, which gets given to fund companies weekly, bi-weekly, and monthly, the fund companies keep buying more and more stock at higher and higher prices.

Once you see the return in the 401k/IRA's you start to think that the 4% that you receive from the bank in a little small and you move that money into the market. This is happening today.

Margin accounts from reputable firms(vangard fidelity ect), only let you borrow up to 50% of your portfolio's value to invest. This is one way to excellerate your growth when the market is rising. When the market is falling this will really accelerate your fall(note that the market has not fallen in over 10 years and 75% of the current investors have never seen a down market. Margin accounts are different from the late 20's where you could wind up your portfolio by using margin loans on top of margin loans to get growth. This type of wind up is what got LTCM in trouble where they had less than 10% of their own money invested, then invested in the falling Russian economy.

As for morgaging the house value for money, this is what happens when a worker is displaced and needs a job. As long as they pick well, they can do well. However, they have been the ones speculating in the technology sector which IMO is very over priced. When that takes a fall, you can say good bye to the day traders. When the value of thier portfolio dropps 25%, they will be required to sell by their margin holders. This will be the best days for the value investor.

Also that 20% correction, in the market, will come but no one knows when. It will rely on the feelings of the investors for its start. When enough feel that the market is overpriced, and sell their position, it will start, but only if others do not buy. The end of the down fall is the best place to start buying.

IMO, now is a good time to have some cash ready, but don't hold your entire portfolio in cash.

Of coarse, I could be wrong. It wont be the first time and it wont be the last.

-- ned (ned@nednet.com), January 20, 2000.

The gov't response?

PRINT MORE MONEY!

We are on the road to hyperinflation.

-- Ishkabibble (ishman@home.com), January 20, 2000.

My own opinion is that the Fed used Y2K as their EXCUSE to print up the extra money, knowing they could use it to prop up the stock market until the elections. Most of the extra money floating around will be spent. Some will buy into the market, some will expand their holdings in the market. Others, who might not be investors, will blow it. NOBODY will SAVE a penny of it. (Actually, who'd want to? It's already nearly worthless. Inflation is strictly defined as "too much money chasing too few goods." If we don't manufacture anything, and our pipline from China for all our goods is shut down for whatever reason, what will we buy with all that money? Wheelbarrows won't be big enough to carry our wallets.

-- Liz (lizpavek@hotmail.com), January 20, 2000.