Is this the end of cheap money?

A harrowing global market sell-off has been unleashed as policymakers start tightening liquidity.

By Anthony Mirhaydari Jun 20, 2013 1:29PM

For the first time since 2012, the Dow Jones Industrial Average looks set to close below its 50-day moving average. This is a huge shock to many observers, since, dosed with cheap money from the Federal Reserve and other major central banks, it was easy to forget that stocks can indeed go down. They're quickly making up for lost time as stocks fall gracelessly out of a two-month consolidation pattern.


Sentiment measures, investors positioning and technical indicators all suggest additional downside pressure to come. But more importantly, the catalysts for the sell-off -- the specter of a reduction in the Fed's $85 billion-a-month bond purchase program and turmoil in the interbank lending market in China -- represent a broader shift: Money is getting tighter.



You can see this in the way bond yields have been spiking, raising the borrowing costs for governments and corporations. The chart below shows how five-year Treasury yields have surged to 1.3%, returning to levels not seen since mid-2011. This unwinds the drop in the cost of money associated with the August 2011 U.S. credit rating downgrade.



This, in turn, is affecting the stock market by multiple vectors. It reduces the ability of corporate CFOs to lever up their balance sheets by borrowing from the bond market and using the proceeds to fund dividend hikes and share buybacks.


And in Japan, higher government borrowing costs have sucked the wind out of the liquidity-fueled rally we saw earlier this year. The Nikkei 225 recently fell into bear market territory and is still down more than 18% from its May high. As the 10-year Japanese Government Bond yield climbs back toward 1%, it inches closer to the 2% threshold that would effectively render Tokyo insolvent.


In the end, all of this reduces the cash available to speculators to boost stock prices. It's the asset price deflation/recession theme I wrote about weeks ago. It started in commodities like copper back in September. It spread to emerging-market stocks in January. Hit precious metals in April. Corporate bonds in May. And now, finally, it's hitting U.S. stocks.


 REB Images, Blend Images, Getty ImagesAs asset prices fall, the complicated web of asset hypothecation collapses as collateral becomes less valuable and margin debt is called in. Remember that cash balances at client accounts with NYSE exposure have fallen below the lows of the 2007 bull market top and have returned to levels not seen since the dot-com bubble was topping. Investors are extended and complacent.


Something similar is happening in China's banking system as Beijing tries to reel in an overleveraged financial system inflating credit bubbles, especially in real estate. As liquidity is removed, its price rises: Short-term money market rates surged to more than 10% last night (nearly triple the level of just two weeks ago) as the People's Bank of China said it wouldn't inject cash to calm the situation.


Chinese policymakers are trying to send a message. Just as Federal Reserve Chairman Ben Bernanke did Wednesday. And that message is that people need to prepare for a future in which money costs more, either because policymakers are losing control of their ability to push down interest rates, or they pop credit and asset price bubbles before they become too large and too destabilizing.


And as liquidity-boosted asset prices fall, liquidity will further tighten. Then emotion will kick in. 

Volatility is moving higher, boosting the CBOE Volatility Index (VIX), as options traders scramble into put option protection against further stock market declines. Other attractive plays here include the ProShares UltraShort Europe (EPV) as European financials like ING Group (ING) weaken.  



Basic materials stocks like Alcoa (AA) are also leading the decline, as are homebuilders like DR Horton (DHI), on fears that higher borrowing costs will knock the wind out of the housing market. 

Other ETF options I'm adding to my Edge Letter Sample Portfolio today include the ProShares UltraShort Dow 30 (DXD) and the Powershares 3x Inverse JGBs (JGBD).


Disclosure: Anthony has recommended EPV, JGBD, and AA short to his clients.

Check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​​​​​​​​​​​​​​​​​​​​​​om​​​​ and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

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Jun 20, 2013 2:33PM

Me? Well, I can only hope that this is the end of cheap money. The low interest rates have been an impediment to true economic recovery. Retired people could use interest income to supplement social security. Vacant for 5-years. And the cheap loans to Wall Street are being used to plow money into the stock market; a market that is propped by subsidies, bailouts, chewing gum, and spit.


There was and is no recovery. Borrowing money at low interest to gamble on the stock market, is not a recovery. It's a "fix" for those addicted to money. Cut the cash-drug. Let the average guy have a chance. Stop robbing us, to support a sham economy.

Jun 20, 2013 3:05PM
Perhaps without $85B / month of paper going into the economy the "recovery" on Wall Street will start to mirror the "recovery" on Main Street.
Jun 20, 2013 3:09PM
Easy money? Who is the author kidding? Nothing easy about saving and watching liquid funds earn next to nothing while people who are not responsible file bankruptcy, collect welfare or find other ways to scam their way through life. Nothing has been easy for me or many others that I know.
Jun 20, 2013 3:11PM

"five-year Treasury yields have surged to 1.3%"


Never would have thought I'd hear "surged" and "to 1.3%" in the same sentence.



Jun 20, 2013 3:22PM
I know low interest rates have been a boom to some industries but a bust to many others. I own an independent auto repair shop and these low interest rates have killed my business the past two years. When you can lease fuel efficient car for $99 a month with no money down and free maintenance, why would anyone keep repairing an old gas guzzler?   But in my area new banks are being built everywhere. I guess the bank bailouts worked. The people that ran this country into the ground are making money. 
Jun 20, 2013 3:07PM
The fed has been trying to prop up this miserable economy for some time now. Ya think even they don't believe it will get better any time soon? Just wait for inflation to really kick in...the worse form of taxation a government can bestow upon a population!
Jun 20, 2013 2:57PM
Ben announces no change in the feds monetary policy until the end of the year, which is what he's been saying all along. This is nothing but computer trigger selling by the Big Dogs who run the show.
Jun 20, 2013 3:28PM


Enough of this living on credit crap, already - it only lines the pockets of the money lenders!


Jun 20, 2013 3:33PM
I remember 1991 mortgage rates were 9%. Everyone thought that was great! That's when I built my house. The economy was a lot better then then it is now. Somehow I don't buy this notion we need cheap money for a good economy. Because I have seen it better with higher rates.
Jun 20, 2013 1:54PM
This is not the end of cheap money, it is the beginning of real money. Real interest rates will go up, commodities will go down, the value of the dollar will gain, consumer purchasing power will increase. The stock market may go down for a while, however, the fundaments are good. The big question now is congress???? Taxes on business must be lowered and eventually remove completely. America needs to head into a final consumption sales tax. If it is done over time (5 to 10 years) we will handle it very well and our standard of living will improve considerably. Bernanke has done his job. Now it is up to the American people and congress and congress is our enemy.
Jun 20, 2013 2:58PM
We'll I guess Tony is finally right, today that is.  He'll keep signing that tune until he is right.  If you actually listen to what Bernanke said, it doesn't sound like the easy money is stopping to me. He simply said they might taper a little if things keep picking up.  Tapering is a lot different then starting to raise rates. People are acting like he said he was going to maybe start raising rates. Does anyone read anymore or do they just react to their own pre-conceived notions?  Benanke said raising rates, which is the real threat, is a long way off.  I do think the market needs a correction though, mainly because it has gotten "frothy stupid". 
Jun 20, 2013 3:43PM

Econ 101...what goes up, must go down. This little correction is nothing. Look at how much the market has went up past 2 years alone.


The same BS thinking that the market should always be going up is what gave us in part, the dot com bust in 2000.


If there was a rule on Wall Street that traders could not be compensated when selling their clients investments for a that would really be something. So just hang in there

Jun 20, 2013 3:35PM
For the  85 Billion per month to stimulate this economy its been money wasted. The economy benefited very little while Wall Street reaped the rewards of all this money.

So if the economy got this 85B boost each month, how many months has The Players been getting paid?

Jun 20, 2013 3:47PM
The government stats on price increases are no longer fooling the american consumer.  A single mother of four kids is a better CPI than any other index.  Yes we are all being robbed. But Ben Bernacke is no Paul Volcker.
Jun 20, 2013 3:50PM

Other developments to think about: China's economy is faltering and loan requirements there are tightening up. So China will be having its' "come to Jesus moment" when its market tumbles.


I'd really like to help China out some more and propose we (US) just tear up the T-Bill debt owed to China and tell them "tough luck , we taught you capitalism, now it's time for you to deal with the downside of unchecked expansion". Now that would bring long term relief to our economy and the multi-nationals would have to come back to the US hat in hand for loans and labor to produce goods.


Oh sure, Walmart would hurt for a while but would recover and the US economy would take off.   

Jun 20, 2013 1:43PM
It's the end of the economic and housing recovery. Retired people will STOP buying and spending in retaliation to the FED allowing banks to boast rates while screwing depositors and savers.
Jun 20, 2013 4:23PM
I'm 64 and have never, never seen the working man win in the long run. When the middle class starts to see daylight the government will tax them or change the rules about saving for your retirement. I've managed to save for retirement in spite of the government. Also a rise in interest rates will never make up for the raise in inflation when your retired.
Jun 20, 2013 3:18PM
" either because policymakers are losing control of their ability to push down interest rates, or they pop credit and asset price bubbles before they become too large and too destabilizing."
Or both, is more like it. Bernanke's bubble is starting to leak. Time for him to go to GS and get a big fat bonus for being a good tool in the shed.
Jun 20, 2013 3:14PM
Asset hypothecation......Really MSN?  I like his charts better. A big decline in the markets merits TWO articles by Mr. Mirhaydari? Carnac the Magnificent has spoken.  
Jun 20, 2013 5:31PM
I'm going to assume we are not all stupid here. Come on we all knew the only reason the dow was at  15,000 is because the fed pumped trillions of dollars into the economy. It did no good because only the banks and financial institutions strived while main street folks suffred. Thats right the ecomomy has been artifficially stimulated since 2007. Now when they stop pumping money into the economy things fall like a rock. The fed had no choice since China has stopped loaning us money.
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