no bubble

Enrique Diaz-Alvarez enrique at
Wed Apr 12 07:48:40 PDT 2000

JW Mason wrote:

> Enrique Diaz-Alvarez wrote:
> > Except more than all of those buybacks are being carried out with freshly
> > borrowed money, so from the point of view of shareholders it is a wash -
> > they get the money, but also the increased liabilities of the companies
> > they own.
> Whether or not it makes a difference depends on what you think is guiding
> investor behavior, right? You've suggested a couple of times that small
> increases in interest rates won't have much effect on the stock market--if
> you're expecting a 20% return, what does it matter whether you're paying 7 or
> 8 or 9% to borrow? But if investors are mainly responding to their increased
> claim on corporations' cash flow, as I'm suggesting, that reasoning doesn't
> hold.

Agreed. I've offered some evidence that my explanation is correct. Inflows have actually increased, personal spending continues to outpace personal income, margin debt exploding, all of this after five interest rate increases

I think investor behaviour is simple: everybody "knows" stocks are the best investment, and investing in anything else is stupid. They will continue to borrow to do so (even though most are probably not aware that they are: in my experience, most people do not make a connection between their purchases of stock and their credit card balances) until this perception changes. 2/3 of investors do not know that a rise in interest rates makes bond prices go down. Do you really think they can make the connection between rates, cash flow and repurchases?

-- Enrique Diaz-Alvarez Office # (607) 255 5034 Electrical Engineering Home # (607) 272 4808 112 Phillips Hall Fax # (607) 255 4565 Cornell University mailto:enrique at Ithaca, NY 14853

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