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world full of liquidity


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#1 greenie

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Posted 04 January 2007 - 12:02 PM

Ok folks - you heard in the MS media so many times that world is full of liquidity now. What you hear in media is always right, true? :D For those of us, who like to doubt the media a bit, there is no ocean of liquidity today. In fact, liquidity is going down. However, the risk premium of existing money has gone down - typical of finale of a long bull market. Let me give you an example. Suppose you have a margin account. That does not mean you always need to trade fully leveraged with no room for error. Now, let us say you made 5 or 10 trades and they all were ok. Now, your fear goes down and you start to take more and more risk, because you think you are a genius. What does the other side see? They perceive that liquidity of your trading account is going up 15% every year. The same thing is happening at every level around the world. What will happen next? We will find out.
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It's the illiquidity, stupid !

#2 SemiBizz

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Posted 04 January 2007 - 12:09 PM

I see a myth but for different reasons. With the boomers moving into retirement, there are lots of "transfer" transactions as funds are redirected from pension plans, IRAs and 401Ks to individual accounts. I also see liquidation in other types of assets unnecessary 2nd and vacation homes, excessive automobiles, boats, airplanes etc... Net/Net, it's just a bunch of paper flying for the most part as nothing is really being added to the economy.
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#3 IndexTrader

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Posted 04 January 2007 - 12:21 PM

Evidently all those people who went to work over the last few years who now have 401K's, etc etc don't count? Not to mention additional retirement savings by baby boomers. Just in case someone doesn't know, the end of the baby boom was born in 1964. That means they are turning 43. The lead edge is about 61. This is a huge chunk of the population moving into peak earning years, and focused on retirement. This goes way beyond a simple margin account. IT

#4 dcengr

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Posted 04 January 2007 - 12:23 PM

Liquidity = money supply which is still growing. Money has to be parked somewhere... either in banks or whatever. Only the fed has power to destroy money, hence the conservation of money principle. But there's a few thought experiment I can site... Lets say Paul and Peter are the only two traders in the world. Both have $100 each, total of $200 in the world. Paul has a stock that he writes $50 on it. Peter buys that stock from Paul, now Peter has $50, and Paul has $150. Peter writes $100 on the stock, then Paul buys it. Now Paul has $50, Peter has $150. Total amount of money in the world is still $200. But the stock is now worth $100, not $50. The price of the stock can go up or down, but the total $200 is still there.
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#5 traderpaul

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Posted 04 January 2007 - 12:31 PM

There was a topic on TV.....70% of the workers live from paycheck to paychck.....There is a store in my neighberhood that gives out advance payment on paycheck and charging high interest.....Now, tell that guy that goes to that store there is high liquidity.....He will turn around and say what are you smoking.....
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#6 greenie

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Posted 04 January 2007 - 12:34 PM

Liquidity = money supply which is still growing. Money has to be parked somewhere... either in banks or whatever. Only the fed has power to destroy money, hence the conservation of money principle.


Two myths above. Let me try to dispel them.

1. liquidity = supply of money + credit. Credit portion is dominant today.

If you have a home priced at $100,000, you may be allowed to borrow at 1:5 ratio (20% down) or 1:100 ratio (1% down) in different environment. In the first case, the supply of money+credit goes up 5 fold, 100 fold in the second case.

2. Credit gets destroyed by the market, not Fed. Fed is powerless, when market is leveraged at 100 fold and then wants to readjust to 5 fold.

Also, the assets behind the credit market are most inflated at 1:100 leverage. So, the asset price goes down, as the market adjusts to higher risk thus making the process more difficult.



Evidently all those people who went to work over the last few years who now have 401K's, etc etc don't count? Not to mention additional retirement savings by baby boomers. Just in case someone doesn't know, the end of the baby boom was born in 1964. That means they are turning 43. The lead edge is about 61. This is a huge chunk of the population moving into peak earning years, and focused on retirement.


If they are saving so much, why is the total savings rate in US falling negative?

MSM does not even talk about new hires or baby boomers to justify liquidity. The new buzzword is 'worldwide savings glut'. Supposedly, Chinese and Indians are saving so much, USA has moral duty to spend :D :D
It is not the doing that is difficult, but the knowing


It's the illiquidity, stupid !

#7 IndexTrader

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Posted 04 January 2007 - 12:38 PM

Liquidity = money supply which is still growing. Money has to be parked somewhere... either in banks or whatever. Only the fed has power to destroy money, hence the conservation of money principle.


Two myths above. Let me try to dispel them.

1. liquidity = supply of money + credit. Credit portion is dominant today.

If you have a home priced at $100,000, you may be allowed to borrow at 1:5 ratio (20% down) or 1:100 ratio (1% down) in different environment. In the first case, the supply of money+credit goes up 5 fold, 100 fold in the second case.

2. Credit gets destroyed by the market, not Fed. Fed is powerless, when market is leveraged at 100 fold and then wants to readjust to 5 fold.

Also, the assets behind the credit market are most inflated at 1:100 leverage. So, the asset price goes down, as the market adjusts to higher risk thus making the process more difficult.



Evidently all those people who went to work over the last few years who now have 401K's, etc etc don't count? Not to mention additional retirement savings by baby boomers. Just in case someone doesn't know, the end of the baby boom was born in 1964. That means they are turning 43. The lead edge is about 61. This is a huge chunk of the population moving into peak earning years, and focused on retirement.


If they are saving so much, why is the total savings rate in US falling negative?

MSM does not even talk about new hires or baby boomers to justify liquidity. The new buzzword is 'worldwide savings glut'. Supposedly, Chinese and Indians are saving so much, USA has moral duty to spend :D :D


Savings as reported by the Feds does not include 401K's...which is what I mentioned.

IT

#8 dcengr

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Posted 04 January 2007 - 12:41 PM

Two myths above. Let me try to dispel them.

1. liquidity = supply of money + credit. Credit portion is dominant today.

If you have a home priced at $100,000, you may be allowed to borrow at 1:5 ratio (20% down) or 1:100 ratio (1% down) in different environment. In the first case, the supply of money+credit goes up 5 fold, 100 fold in the second case.

2. Credit gets destroyed by the market, not Fed. Fed is powerless, when market is leveraged at 100 fold and then wants to readjust to 5 fold.

Also, the assets behind the credit market are most inflated at 1:100 leverage. So, the asset price goes down, as the market adjusts to higher risk thus making the process more difficult.


Let me expand my example.

Peter and Paul both have $100 each.

Paul writes $150 on the stock and wants to sell it to peter.

Peter only has $100, so he will borrow $50 from Paul. Paul gives Peter $50 and Peter gives Paul a $50 I.O.U.

Now Paul has $100+$150 from Peter, but minus $50 he loaned to Paul. So Peter has $200, Peter has a stock worth $150, but a loan of $50.

Total amount of money in the world is still $200, but stock is now valued at $150. The price of the stock has NO BEARING to the total money in the world.

The maximum value of the stock is $200 (total money supply). This game continues until Paul decides he's robbed Peter enough of his money.
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#9 KCScott

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Posted 04 January 2007 - 12:47 PM

Evidently all those people who went to work over the last few years who now have 401K's, etc etc don't count? Not to mention additional retirement savings by baby boomers. Just in case someone doesn't know, the end of the baby boom was born in 1964. That means they are turning 43. The lead edge is about 61. This is a huge chunk of the population moving into peak earning years, and focused on retirement.

This goes way beyond a simple margin account.

IT



I'm under the theory that as the Boomers reach retirement, more and more will sell their stocks, Funds, etc. and move into cash. there will not be the buyers there, hence prices will fall.

Thoughts?
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#10 jawndissedi

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Posted 04 January 2007 - 12:51 PM

Greenie is right about liquidity. If you find his explanation insufficient, click here for John Hussman's more lengthy analysis.
Da nile is more than a river in Egypt.