Why is the money supply soaring?

HSBC Holdings Plc, one of the world's biggest banks, said it will set aside $1.76 billion more for bad debts than expected, largely for problems in U.S. "sub-prime" loans. (Reuters)

New Century Financial Corp., a big California sub-prime lender, forecast a surprise fourth-quarter loss and said it will reduce profit in the prior three quarters because defaults are rising. Its stock sank 36 percent Thursday. (Reuters)

"Sub-prime was a business (where) you take inferior credit, but you'd require superior equity," Angelo Mozilo, chief executive of Countrywide Financial Corp., the largest mortgage lender and No. 4 sub-prime lender, said on Jan. 30. "That all disappeared in the last couple of years and you get a 100 percent loan with marginal credit and that doesn't work." (Reuters)

ABM Amro Holding NV, KeyCorp and National City Corp. decided to sell subprime units. Ameriquest Mortgage Co. and H&R Block Inc.'s Option One unit are up for sale. Wachovia Corp. last week shut its sub-prime unit. Sebring Capital Partners LLC closed. Mortgage Lenders Network Inc. and Ownit Mortgage Solutions Inc. filed for bankruptcy protection. (Reuters)

The markets strive on crises.

1. Bankers do not want sub-prime borrowers to go under. They will keep them financially afloat for as long as it takes to get their money back. Implication: the housing crisis will drag for a long time.
2. The Fed is allowing the money supply to soar, up close to 9% (as in Europe). This strong growth in liquidity will help the banking system to survive this crisis.
3. Financial crises have been good news for the stock market…eventually. All this liquidity finds its way in the equity market and stocks rise.

More on www.peterdag.com .

George Dagnino
aka Peter Dag
Editor, The Peter Dag Portfolio
Since 1977