A big drop in the demand for mortgages might be positive for stocks, suggests Paul Kasriel, the publisher of The Econtrarian.Kasriel points out the most recent year-over-year decline in household mortgage borrowing as a percent of DPI is unprecedented in the post-WWII period.
He also points out that at the same time households are slowing down their borrowing relative to their income, corporations also have slowed their debt issuance relative to their income. Corporations are using extra income to buy back stock.
Kasriel says this could bode well for equities, since both individuals and corporations have been paying down a boat load of debt. At some point, individuals will have paid down enough debt and corporations will have shrunk their stock base to a point where demand for stocks will be much greater than supply--thereby leading to much higher stock prices.
Kasriel points out that today's situation is not too different from the late 1990s when stocks took off.
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