Liquidity and Leverage Behind Enormous Surge in Indexes

If you don’t follow the stock market, you might not know that after a few weeks of declines, global stock indexes surged north for five days (if it stays up today). You might not even think that it was unusual, unless you watch the market daily, as I do.  Let me assure you: After twenty years of watching and sometimes trading the markets, this is some very odd stuff!

Though I have seen about five market “bubbles” (and nearly as many crashes) in my career, I am still amazed when I see markets do things they are not supposed to do. When I am amazed, I become curious. I want to know “Why?”  And even if I have to resort to conspiracy theories to get an explanation that suits me, I eventually come up with one.

This time, I am tempted to blame it on the Fourth of July. Some super-patriot at the Fed or the President’s Working Group on Financial Markets might have decided to give this beleaguered country (and the rest of the world in the bargain) a birthday present by sending the markets on a nearly vertical 600-point crash upward. It isn’t hard to do, really, but the Fed can inject money into the system through the purchase of securities, and it finds its way into the indexes very quickly.

The other reason is that we have enormous amounts of “liquidity” sloshing around in the global financial markets. Liquidity is buying or investing power, though it often consists of ridiculous “leverage.”  Leverage is debt. Big players in the markets are often granted the chance to play in the big game with only 5-10% down, controlling massive positions in commodities or stocks or currencies with very little in cash or collateral.

Leverage has been the source of every major financial catastrophe that I can think of. Nice that those owning large positions in stocks see their wealth increase, but not sure that monetary steroids are good for the rest of us.



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