Every frat house manager knows that if you want to end a party, you take away the keg. And that’s pretty much all you need to know about why the stock market is so sluggish this year.
The banks have sharply cut back on the credit they’ve allocated to hedge funds, making less money available to purchase stocks and bonds of all stripes. Less borrowing = less buying power. It's pretty simple.
The latest evidence of this action has come from reporters at the Financial Times, who say they’ve discovered that the most leveraged funds are now borrowing no more than five times their asset base -- down from at least 10 times their base six months ago. That means a $100 million hedge fund that was buying up to $1 billion worth of stocks a year ago now can only buy less than $500 million worth. That's a big difference.
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