Tsunami of Cash!

The tsunami of cash on the side lines.

The determination of future of the economy is the money supply and cost of money.

We have lots of money supply and cost of borrowing is going down.

The hoards of cash in the system are caused by

US Government:

1. Economic Stimulus Act of 2008 (2-13-08): 170 billion

2. Housing and Economic Act of 2008: 130 billion

3. Emergency Economic Stabilization Act of 2008 700 billion

Total liquidity provided to the system 1,000 billion

Federal Reserve:

1. Term Auction Facility: 1,420 billion

2. Purchase on commercial paper market potential 1, 550 billion

   Total potential liquidity provided by the FED 2, 970 billion

The total potential injection of liquidity into the system thru other buyout guarantees and the numbers stated above has exceeded : 4 trillion dollars. This do not include actions taken by European and Asian central banks. There is no lack of liquidity out there, the current situation of capital market decline is caused by fear. Historically speak over optimism or over pessimism will not last.

The cost of money on all fronts are is sliding:

1. LIBOR from 3.94% (September,08) to 2.18%. (Current)

2. The fed discount rate reduced 2.25% (September,08) to 1.25% (Current)

3. The benchmark federal funds rate 2.03% (September,08) to 0.67% (Current)

The widening yield curve of Junk bond yield compares to Treasury yield is at 16 percentage point. This is the widest ever yield curve has gotten. When the yield curve being to tighten as investor shift to riskier, there will be a tsunami of money flowing into bonds and equities.

The hoards of cash in the system and low cost of money had caused the bull run in the stock market post September 11, 2001. We will be witnessing a similar run in the stock market as other are busy looking at the wreckage of credit crisis. The US stock market is setup to be forward looking, it will recover much sooner than the economy.