Market Pressure
How can we explain financial markets? This week, millions of investors are trying to make sense of the past few weeks. Why did bank shares collapse so much? Can any rebound be sustained and what might be around the next corner?
Before we try to answer these questions, it is important to appreciate that we are probably not out of the woods yet. The volatility in markets implies that one piece of bad news can send shares tumbling. On the other hand, a ray of hope is seized upon as a sign that good times are ahead and shares surge. It is clear that now that "no one knows anything, about anything." Traders are caught in the constant crossfire reeling from fear to elation.
Common sense suggests that we are now in a financial phase that could be described as the great unwinding. All over the world, leveraged bets that were placed in the past five or six years are being unwound, and credit is getting not only tighter but in many cases has disappeared altogether. Many people have been terrified by the suddenness and the magnitude of the downturn and are seeking a plausible explanation of the crisis that doesn't involve things we've never heard of...like CDOs, ABSs, monoline insurers or structured products, to name a few.
One interesting and possibly helpful way of looking at the behavior of financial markets is to compare it to geology.
The earth's rigid outer shell, the lithosphere, is broken up into an extraordinary mosaic of oceanic and continental plates. The financial equivalents of the geological mosaics are the many markets which reflect global economic trends such as the stock markets, the commodity markets, housing markets, and foreign exchange markets. In geology, just underneath the lithosphere, there is another layer -- a more fluid, plastic-like surface, called the asthenosphere. This is the uppermost layer of the earth's boiling core, which bubbles away below. Trends in financial markets and global economics such as bank lending, house prices, and immigration create the same pressure as they bubble away under the surface.
Ultimately in geology, when the pressure in the bowels of the earth gets too intense, the core bubbles and occasionally, where the lithosphere is thin or cracked, it explodes via violent volcanoes. We can regard financial deregulation -- which America bought into big-time -- as a process which stretches the economic lithosphere making it susceptible to cracks. Put simply if the banks lend recklessly to people who had no means of paying the money back and then dress up this loan as an asset that can be traded, we know that credibility as well as prudence have been stretched.
When pressure gets too extreme in financial markets, the resulting violent volcanoes can be seen in the banking crises, house price booms and busts, large falls in exchange rates and gyrating stock prices.
Normal day to day market fluctuations are like the daily grinding of the Earth's continental plates. So for example, along the 1,200 km San Andreas Fault, the Pacific Plate has been grinding horizontally past the North American Plate for 10 million years at an average rate of about 5 cm per year (about the same speed as your fingernails grow). There are about 10 other main fault lines across the globe, so earthquakes both on land and under the sea are relatively easy to locate, but predicting precisely when they will happen is almost impossible. The crucial thing is that although we can assess the pressure points, we don't know for sure exactly when and with what intensity the financial markets will erupt.
In times like this, the world is living on a financial San Andreas Fault and everyone is worried that the next tremor will be "the big one."
David McWilliams is author of The Pope's Children (John Wiley and Sons), available now.
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The Dutch Tulip speculation of the 17th Century, the Southsea India Trading Company frenzy of the 18th Century, the railroad building speculation of the 1840's in our own country: These and other speculative bubbles pale in comparision to the American mortgage and bond pyramid scheme of the Bush Administration and central banking system. This bubble will pull us from the top tier to the bottom of the heap of modern nations. We are into financial quicksand and sinking while dissolving our currency. What we should do, rather, is alllow the entire fraudulent assets paper collapse naturally and let the chips lay where they fall. Then wiser leaders representing middle America can adjudicate short and long range goals and strategies to pull us out of the depths of bankruptcy and ruin. If we turn away from our individual selfishness to unified selfless work and sacrifice according to ability, we can yet sustain our Constitution and ideals. And we shall spark within a new generation of Americans a renewed dedication to our Constitution, Bill of Rights and civic responsibility.
I hope your final sentence turns out to be true!
"How can we explain financial markets?"
They are designed by and for those who control the most wealth, to work for their continual profit at all social and economic cost, without regard to the general good.
"We can regard financial deregulation -- which America bought into big-time -- as a process which stretches the economic lithosphere making it susceptible to cracks."
How about defining deregulation as allowing bankers to create secret kinds of money that even regulators don't understand, and then agreeing to share that secret "sort-of" money in a way that prevents those same bankers from failing?
"In times like this, the world is living on a financial San Andreas Fault and everyone is worried that the next tremor will be "the big one."
The world is living on the financial San Andreas fault by design of the private, unregulated investment companies who created their secret money "holdings" and structured them in an inter-dependent corporate structure making them all too big to fail.
And here we sit.
On the edge.
Waiting for the big one.
PS It hasn't happened yet.
They gave Ronald Regean a $ 5 Million Dollar home in downtown L.A. as a thank you gift for deregualtion.
That should tell you something. They openly paid off a President after he leaves office!
And whatchagonnadoboutit?
I am not worried. I have been living at the bottom of the heap for many years. As a matter of fact some people have even had the audacity to say "You have nothing,you have no investments,thus you are a nobody". Yes, they were right. But now, it is with great glee that the snobby F%$#s are finally losing it. I wan't to see the rest of America come down to my level and see what it is like. Y'all enjoy yourselves now!
When the Chinese and Japanese central banks stop buying US Treasury bonds, you'll get your financial equivalent of a San Andreas eruption. I wouldn't count on Mr. McWilliams getting much of a Social Security when he gets older. The big one will probably have hit by then.
Meanwhile, the next bubble is a' brewing. Defense contractors are raping and pillaging the gov't tills and are headed for a showdown with reality and an eventual bubble that will put the nail in the coffin of this "free market" economy, where we bailout the same people who whined about regualtion, until it saved their bonus...
Actually, it's allot more like "Musical Chairs," Everything is fine as long as the music is playing and then suddenly, Bamm, the game is over are not everybody gets a chair.
what an arcane and twisted analogy.
are you trying to explain or..........
d
As a citizen, not American born, I do hope you will humor me as I answer your question, "How can we explain financial markets?" with this:
http://www.brasschecktv.com/page/187.html
performed by some folks close to your home and devastatingly funny, and accurate!
Rule,your video link is spot on,the geological reference of the article also applies to the time frame needed to rebuild your portfolio.The sad thing is that the pirates binvolved will move on to their next source of plunder.
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