Monday, July 14, 2014

Leverage

When we borrow to buy a paper asset like stock, we have to cover a partial pre-payment if the stock price drops. Leverage is having little liquidity to cover the per-payment.
Low short term rates increases the price of stocks because they act as a liquidity equivalent in a liquid stock market. A sudden rate increases causes a scramble for cash and a fire sale in stocks.

Will short term rates rise suddenly? I doubt it.  They will rise if we get a price distortion, like a sudden increase in oil prices. But I doubt it.

What about unexpected lower corporate earnings? Most of the is already priced in.
Is this a bubble? Sure is, but a bubble that will hiss, not pop.

Read more by Ambrose Pritchard.

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