The Oil Drum

207 comments on DrumBeat: May 22, 2007

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Burgundy on May 22, 2007 - 6:11am

Bubbles are everywhere
http://business.timesonline.co.uk/tol/business/money/investment/article1...

Look first at the US. Here the economy is a mess. On the face of it consumption (the main driver of economic growth) looks fine, but peer behind the headline numbers and you’ll see how the spending is being financed – and it isn’t very encouraging.

Consumer credit rose sharply in March by $13.5 billion (£6.8 billion) suggesting, said Christopher Wood of CLSA, a broker, that with house prices no longer rising and “the home credit equity line cut off”, American consumers are turning to their credit cards.

Mastercard saw the number of transactions using its cards rise by nearly 20% in the first quarter of 2007. That’s clearly not sustainable. Even with the growth in card use, consumer spending rose at its slowest pace for five months in March. Economic growth fell to a miserable 1.3% in the first quarter, a four-year low, and there could easily be a further – and entirely justified – growth scare ahead.

Indeed, if the housing market continues to suffer – note that existing home sales fell 8.4% in March, the biggest drop in 18 years – it is possible the economy might stop growing altogether.

Yet even against this background the Dow Jones index has been rising steadily almost every day since the hiccup of late February. Most forecasts have it continuing to do so and a can’t-lose mentality appears to have taken hold of markets. By the end of March the amount of debt taken on by investors specifically to buy shares totalled £318 billion. That’s more than in March 2000 – the peak of the tech bubble.

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Stoneleigh on May 22, 2007 - 6:29am

Cat rescued from tree, DOW surges 100 points :-)

Any excuse will do as markets continue to move on the expectation that global central banks don't have the cojones to withdraw liquidity, that is, to increase the cost of debt in our highly leveraged global financial system, so the flow of money to finance deals will continue unabated. Like the IPO mania of 1999, this disease has infected not a few hundred board rooms of dot coms and telco companies, which industries represent a few percent of the US economy, but thousands of board rooms, representing just about every public company in every market and a significant share of the US economy. We have yet to speak to a CEO or senior exec of a public company that won't confide the giddy hope, bordering on conviction, that their company is next in line to receive a proposal for marriage from a larger company, an LBO from a private equity firm or hedge fund, or some other source of capital that will result in a personal financial windfall. These expectations have infected DOW and S&P investors as well. With so many betting that the company whose stock they own is likely to be over-bid in a take-over, why sell?