Mogambo Goes....Where Mogambo Wants

PRICES BENEFIT FROM SPOOKED SHORTS
by The Mogambo Guru

Why are the stock markets and bond markets rising? For the only reasonthat there is: Because there are more buyers than sellers! Hahahaha!Okay, I am sorry about laughing, but if I may be so bold as to make asuggestion, perhaps your question would have been better phrased as,“Where are the buyers getting the money to buy all of this stock and bondmadness and act like a bunch of morons?”If that had been your question, I could have saved us both a lot of timeby merely sending you to Online.wsj.com, which reports that, “‘MarginDebt’ Hits Record $353 Billion on NYSE”, which means that, “Investors areborrowing record sums of money to finance trades on the New York StockExchange.”How much money? The Journal continues, “So-called margin debt, a broadmeasure of leverage, jumped 11% to $353 billion at the NYSE in May, upfrom nearly $318 billion in April.” The news that margin debt increased 11% in one month, to a new record, sosurprised and alarmed me that I accidentally swallowed my tongue inhorror! But, thankfully, it turned out to be okay, since it was soonforced back up by my reflexively puking up blood at the sheer horror of somuch speculative debt.And broker-dealers suddenly find themselves with more money, too, as fromJim Grant’s Interest Rate Observer we learn that thanks to the newregulatory system for broker-dealers called Consolidated SupervisedEntity, “the broker-dealers (in voluntary fashion) are implementing therisk-based capital rules known in the trade as Basel II. “The liberating feature of Basel II”, he continues, “is that the financialinstitutions to which it applies may hold more assets per dollar of equitycapital than they previously could - provided that a ratings agency judgesthe assets to be top-flight.”By this time I am so bored by one more story of one more bunch of sleazyoperators in cahoots with corrupt regulatory supervision that I amthinking “Yadda yadda yadda” and trying to stick my pencil in the ceilingjust to keep from nodding off. I was yanked back to cruel reality when Mr.Grant said. “Specifically, under Basel II, a broker-dealer must set asidejust 56 cents in capital to hold US$100 of triple-A-ratedsecuritizations.” Yow! Fifty-six lousy cents? Shocked, I am too, too, too nonplussed to comment, so I turn to JuniorMogambo Ranger (JMR) Phil S., who says that only putting up 56 cents tohold $100 in assets seems a bit much, as “That is 1/18th of the 10% stockmargin equity required in 1929”!! Hahaha! The exclamation points wereadded by me, utilizing my awesome editing powers (“If there is nobody hereto stop me by force, I can do whatever I want”) to add that essentialMogambo Stylistic Flourish (MSF) to give it the dramatic emphasis that ittruly deserves.And the stock market may be going up because there is a huge, toweringoverhang of short interest, and if there is one trick that the sharks ofWall Street reliably pull to eat their fill when short interest expandslike this, it is by suddenly running the market sharply up and squeezingthe shorts, who buy in a panic to cover their enormous short positions andto keep from losing more money if the stock price continues to rise,making prices go up even more, spooking more shorts, who then buy tocover, making prices go up some more, spooking more shorts.And a lot of buying is resulting from lots of foreign investment moneycoming here, too, as an FT.com article quotes Alan Ruskin, chiefinternational strategist at RBD Greenwich Capital as saying “One reasonwhy the dollar has responded in such a negative fashion is that corporatebond inflows have made up half of the current account financing in thepast year.” In fact, he says, “In the 12 months to April, the US received $509bn incorporate bond investment inflows that helped finance the current accountdeficit.” Half a trillion a year!And the market is also going up because the Plunge Protection Team and theentire rest of the governments, banks and financial services industry arebusily intervening in the marketplace, desperately trying to keep stock,bond and housing prices up and rising.And they can intervene with good effect at those times when prices havebeen recently down, and the charts of the market price start hitting thelower bound of their up-trend channels, making technical traders getnervous that prices will fall some more to penetrate the lower channel,meaning that lower prices lie ahead and now is a good time to sell! But nowadays (just in time, every time!), the markets suddenly turnaround, bounce off of the lower bound of the channel, which is a bullishsignal, and the technical traders launch into “buy mode”! Missionaccomplished! But the real reason that markets are going so bizarrely up is becauseexcess money and credit are constantly being created around the world, bycentral banks around the world, and thus money supplies around the worldare expanding at double digit rates around the world, and all this newmoney has to go somewhere, or why would anyone borrow it in the firstplace? And it is going into stock markets, and bond markets, and housing marketsand commodities markets around the world, driving up (by bidding up) theprices of everything. How far away from “price stability” can you getbefore you just say “Ugh!”?