Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Money Supply Bubble, Credit Squeeze and A Lender Who Will ....

Interest-Rates / Money Supply Mar 16, 2007 - 03:54 PM GMT

By: Adrian_Ash

Interest-Rates

"...The bold step in finance - the market-leading decision - now comes by retreating from credit and refusing all risk..."

INNOVATIVE new debt products so ften sound scary.

Credit default swaps, negative amortization mortgages, synthetic collateralized debt obligations...

Doesn't Wall Street ever get its marketing guys to work on these things? You know, just to make them more friendly.

Because the truth is, innovation in finance isn't scary at all. Entrepreneurs and investors should embrace it if they want to get rich. Money loves innovation, and their offspring's called credit.


In fact, what's really scary in finance is failing to innovate. Refuse to offer easy new products on new, easier, terms...and your business will wither and die.

  • If your stock broker won't give you a margin account, then in the end he'll go bust - losing business to brokers who will.

  • If a Wall Street bank won't float a new issue of high-risk junk bonds, then the bank will lose out - and the commission fees will just go to Europe.

  • And if your mortgage lender won't give you 125% of a property's value - leaving you short of money for buying furniture once you've moved in - well, then you'll just go and find yourself a lender who will.

The same applies to mutual funds, credit card companies, department stores, auto retailers...you name it. If they're dealing with money, then their success is driven by credit.

And being driven by credit always means you need to drive faster. Just so long as the cycle points upwards.

Call it a race to the bottom in terms of security. As the supply of credit increases, financial firms need to sit right on the cusp, out on the leading edge. Either that, or they'll lose out to competitors who will.

You need to "push the envelope" and think "outside the box" of underwriting standards, sensible lending and proof of income. Just look at the opportunities that await!

"As many as 22 million households - 20% of US households - are unbanked," noted a 2005 report from the Center for Financial Services Innovation in Chicago. Experian put the total number of "unbanked" Americans at 55 million, nearly one-fifth of the population.

"At least 53% of Mexican immigrants are unbanked," the CFSI report went on. "The combined unbanked and subprime credit population may be 30-40 million households."

Fast forward two years to early 2007, and credit has now gone where credit never dared tread before. Innovation has made sure of that.

"Creative new subprime loans - 'piggyback', 'interest-only', and 'no-doc' loans, among others - accounted for 47% of total loans issued last year," reported the Wall Street Journal recently.

"At the start of the decade, they were less than 2% of total mortgage loans."

But that's the nature of innovation. It either accelerates...or grinds to a halt. Scream if you wanna go faster!

"As long as lenders made loans available on virtually non-existent terms," writes Paul McCulley, managing director at Pimco, "the price didn't really matter all that much to borrowers. The availability of credit trumped the price of credit. Such is always the case in manias."

Hence the Fed's failure to touch the US credit bubble with its 17 hikes in interest rates. For as long as credit remained innovative, the inflationary trend would stay on track.

And now?

"The ongoing meltdown in the subprime mortgage market," says McCulley, will "unambiguously render any given stance of Fed policy more restrictive...Just as mortgage demand seemed inelastic to rising short rates when availability was riding relaxed terms, so too will demand seem inelastic to falling short rates when availability faces the headwind of restrictive terms."

In short, the Fed couldn't stop lenders from lending simply by raising its rates. Nor could the Bank of England, ECB or anyone else.

The Bank of England began raising its rates at the end of 2003. So did the Australian and New Zealand central banks, too. The US Fed started to hike Dollar rates in 2004, and a year later, the European Central Bank tagged along too.

Japan and Switzerland finally began hiking rates - albeit from near-zero - in 2006. But the effect on world money supply has been negligible up until now. Indeed, the "reflation" unleashed by record-low interest rates starting in 2003 just couldn't be tamed, not by a few measly basis points at least.

A quarter-point here and a quarter-point there was nothing against the forces of financial innovation.

Seventeen hikes in US rates? So what! US broad money, according to John Williams at ShadowStats.com, is growing by 11% annually. Eurozone money supply has been growing at 9.8% year on year. Britain's enjoying a 14% year-on-year bubble in money, even though short Sterling rates have risen by one half.

The global money supply has come to have little to do with interest rates, or so it would seem. Some three-quarters of all liquidity comes in the form of derivatives and securitized debt, as the analysts at Independent Strategy have observed. And if raising rates did nothing to slow it, the bubble in money might just start to deflate even if short-term rates now get clipped back towards zero.

The top of the credit cycle may be in - not because real Dollar rates have finally turned positive (which they haven't, by the way...), but because the lenders themselves are shuffling back from the edge.

Leave the market-leader's position to somebody else. The innovative step in finance today is to retrench...ask for secure credit ratings...demand proof of income...switch from digital and paper promises to hard, physical assets.

Once everyone's crept back to tight lending standards and a hatred of credit, the time will have come to step forwards again - and clean up in finance by lending on easy terms yet again.

But that time's not now. The retrenchment has only begun. Be brave - and step back.

By Adrian Ash

Adrian Ash is head of research at BullionVault.com , the fastest growing gold bullion service online. Formerly head of editorial at Fleet Street Publications Ltd – the UK's leading publishers of investment advice for private investors – he is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in