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.
No comments:
Post a Comment