Wednesday, August 22, 2007

Cash Gridlock?

Kasriel of Northern Trust has an interesting series of charts and numbers in a commentary which portends the possibility that Cash Will Be King in the very near future.

As prelude, recall that mortgage financing is becoming difficult to obtain, and that Kasriel's analysis indicates that households have been net sellers of equities over the past few years. Further, he postulates that corporations have been the buyers of those equities, by "retiring stock." (There are some "if" and "however" clauses in the newsletter which deserve attention.)

...the entities to which households have been primarily selling corporate equities – the corporations themselves and private-equity syndicates – have been relying on relatively cheap credit to finance these buybacks and buyouts. But as Chart 12 shows, corporate credit is getting more expensive as bond investors become more risk averse. If this bond-market risk aversion persists and/or increases, it could sharply curtail stock buybacks and corporation buyouts. This, in turn, would reduce a source of funding of household deficit spending – household net sales of corporate equities.

So we have the possibility that: 1) Mortgage-equity loans will be hard to get; and 2) selling equities will become difficult.

Where's the cash coming from?

Source: Econtrarian (click on August 13 issue.)

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