MONEYwhere is Mean Beanz-- for his ilk

Guest62110524 · #1 05-30-2010, 07:47 PM

I have been trading a lot lately and have noticed a lot of market manipulation, I had my suspicions, but this guy put it clearly and precisely
I am pretty scared they can do ANYTHING to us , million NO billions of us are mere pawns and the powers that are honest, Merkle, Brown(gone) can do nothing to counter these forces
Read

Living on the edge
May 29, 2010

Fear no longer has greed in check, writes John Authers, leaving investors overconfident and markets ever more perilous.

It was early in March 2007 that I realised that two of the world's markets held each other in a tight and deadly embrace.

A week earlier global stockmarkets had suffered the "Shanghai surprise", when a 9 per cent fall on the Shanghai stock exchange led to a day of global turmoil. That afternoon on Wall Street the Dow Jones Industrial Average dropped 2 per cent in a matter of seconds. A long era of unnatural calm for markets was over.

Watching from the New York newsroom of The Financial Times, I tried to make sense of it. Stocks were rising again, but people were jittery. Currency markets were in upheaval. In what was becoming a nervous tic, I checked the Bloomberg terminal.

One screen showed minute-by-minute action in the S&P500, the main index of the US stockmarket. Then I called up a minute-by-minute chart of the exchange rate of the Japanese yen against the US dollar. At first I thought I had mistyped. The chart was identical to the S&P.

Had it not been so sinister, it might have been funny. As the day wore on and turned into the next, we watched the two charts snaking across the screen. Every time the S&P rose, the dollar rose against the yen, and vice versa. What on earth was going on?

Correlations like this are unnatural. In the years leading up to the Shanghai surprise, the yen and the S&P had moved completely independently.

They are two of the most liquid markets on earth, traded historically by different people, and there are many unconnected reasons why people would exchange in and out of the yen (for trade or tourism), or buy or sell a US stock (the latest news from corporate America).

But since the Shanghai surprise statisticians have shown that any move in the S&P is sufficient to explain 40 per cent of moves in the yen, and vice versa. Does this matter? Perhaps more than you may think. These two measures should have nothing in common, which implies that neither market was being priced efficiently. Instead, these entangled markets were driven by the same investors, using the same flood of speculative money.

The Shanghai surprise, we now know, marked the start of the worst global financial crisis in 80 years, and plunged the world economy into freefall - the most truly global economic crash on record. Inefficiently priced markets drove this dreadful process.

If currencies are buoyed or depressed by speculation, they skew the terms of trade. Governments' control over their economies is compromised if exchange rates render their goods too cheap or too expensive.

An excessive oil price can drive the world into recession. Extreme food prices mean starvation for millions. Money pouring into emerging markets stokes inflation and destabilises the economies on which the world now relies for its growth. If credit becomes too cheap and then too expensive for borrowers, then an unsustainable boom is followed by a bust.

And for investors, risk management becomes impossible when all markets move in unison. With nowhere to hide, everyone's pension plan takes a hit if markets crash together. In one week of October 2008 the value of global retirement assets took a hit of about 20 per cent.

Such a cataclysm should have purged the speculation from the system for a generation. But by the end of last year, when I began thinking about writing this book, risky assets were well into a strong resurgence and markets were even more tightly linked than they were in early 2007. Once again it was impossible to tell the difference between charts of the dollar and of the US stockmarket. Links with the prices of commodities and credit remained perversely tight. Since then some of that fearful symmetry has dwindled, but that is largely thanks to the Greek crisis - which points to other glaring weaknesses.

The financial disaster of 2007 to 2009, then, has not cured any of the underlying factors that led markets to become intertwined and overinflated and to endanger the world economy. This does not mean that another synchronised bubble followed by a crash is inevitable, but it does mean that such an event remains a distinct possibility.

Like many other financial commentators, I had the unnerving experience of trying to disentangle what had happened and explain it in real time, facing a camera each day to try to give a two-minute potted "short view" for FT.com's video viewers. Having to venture an opinion so publicly at least has the advantage that you soon learn when you have got something wrong (FT.com viewers are not backward at coming forward).

In the feedback, as many others in the markets tried to nail what was wrong, a few recurring themes began to stand out from the noise. Not all were part of the political dialogue at the time. So I tentatively tried mapping out a book that would give a "short view" of the causes that led our markets to malfunction so badly.

Investment bubbles are rooted in human psychology, so it is inevitable that they should occur from time to time. Markets are driven by the interplay of greed and fear. When greed swamps fear, as it tends to do at least once in every generation, an irrational bubble will result. When the pendulum snaps back to fear, the bubble bursts, causing a crash.

History provides examples from at least as far back as the 17th century tulip mania, when Dutch merchants paid life savings for a single tulip bulb. Then came the South Sea bubble in England and the related Mississippi bubble in France, as investors fell over themselves to finance prospecting in the new world. Later there were bubbles in canals. In the Victorian era there was a bubble in US railway stocks; in the 1920s there was a bubble in US stocks, led by the exciting new technology of the motor car.

But in the past few decades there have been more and more bubbles. Gold formed a bubble that burst in 1980; Mexican and other Latin American debt suffered the same fate in 1982 and again in 1994; Japanese stocks peaked and collapsed in 1990, followed soon after by Scandinavian banking stocks; stocks of the Asian Tiger economies came back to earth in 1997; and the internet bubble burst with the dotcom meltdown of 2000.

Some said this was understandable. From 1950 to 2000, after all, the world saw the renaissance of Germany and Japan, the peaceful end of the cold war, and the rise of the emerging markets - events that had seemed almost impossible in 1950 - while young and growing populations poured money into stocks.

Maybe the bubbles at the end of the century were nothing more than froth after an unrepeatable Golden Age. But since then the process has gone into overdrive. Bubbles in US house prices and in US mortgage-backed bonds, which started to burst in 2006, gave way to a bubble in Chinese stocks that burst in 2007.

In 2008, bubbles burst in oil, industrial metals, foodstuffs, Latin American stocks, Russian stocks, Indian stocks and even in currencies as varied as sterling, the Brazilian real and the Australian dollar.

And then last year brought one of the fastest rallies in history.

N

ews from the "real world" cannot possibly explain this. Why were markets so much more prone to bubbles? It is fashionable to blame greed. But this makes little sense; it implies that, worldwide, people have suddenly become greedier than they used to be. Greed, surely, is a constant of human nature. Rather, it is more accurate to say that in the past half century fear has been stripped from investors' decisions. With greed no longer moderated by fear, investors are left overconfident.

How did this happen? I suggest it is

down to what might be called the fearful

rise of markets. Over the decades the institutionalisation of investment and the spread of markets to cover more of the global economy have inflated and synchronised

bubbles.

This rise of markets has brought several trends in its wake, all of which seemed to have contributed to the eventual disaster

of 2008.

Other people's money. In the 1950s investment was a game for amateurs, with less than 10 per cent of the stocks on the New York Stock Exchange held by institutions; now institutions drive each day's trading.

In the past, lending was for professionals, with banks controlling most decisions. Now that role has been taken by the capital markets, which businesses can tap for funding.

As economists put it, in both investing and lending, the "principals" have been split from the "agents". When people make decisions about someone else's money, they lose their fear and tend to take riskier decisions than they would with their own money.

Herding. The pressures on investors from the investment industry, and from their own clients, are new to this generation, and they magnify the human propensity to crowd together in herds. Professional investors have strong incentives to crowd into investments that others have already made.

When the weight of institutions' money goes to the same place at the same time, bubbles inflate.

Safety in numbers. Not long ago market indices were compiled weekly by teams of actuaries using slide rules. Stocks, without guaranteed dividends, were regarded as riskier than bonds. Now computerised mathematical models measure risk with precision, and show how to trade it for return.

When academics produced these theories, they were nuanced with many caveats. Their psychological impact on investors was cruder. They created the impression that markets could be controlled, and that led to overconfidence. They also promoted the idea that there was safety in diversification - investing in different assets.

Diversification per se is almost impossible to argue against, but this notion ended up encouraging risk-taking and led investors into markets they did not understand. This in turn tightened the links between markets.

Moral hazard. As memories of the bank failures of the 1930s grew fainter, governments eventually dismantled the limits imposed on banks in that era. Banks grew much bigger. Government bank rescues made money cheaper while fostering the impression among bankers that there would always be a rescue if they got into trouble.

That created moral hazard - the belief that there would be no penalty for taking undue risks. Similarly, big bonuses for short-term performance, with no penalty for longer-term losses, encouraged hedge fund managers and investment bankers to take big short-term risks and further boosted overconfidence.

The rise of markets and the fall of banks. Financial breakthroughs turned assets that were once available only to specialists into tradeable assets that investors anywhere in the world could buy or sell - at a second's notice. Emerging market stocks, currencies, credit, and commodities once operated in their separate walled gardens and followed their own rules.

Now they are all interchangeable financial assets, and when their markets expanded with the influx of money, many risky assets shot upward simultaneously, forming synchronised bubbles. Meanwhile, banks saw their roles usurped by markets. Rather than disappear, they sought new things to do - and were increasingly lured into speculative excesses.

John Authers is head of the The Financial Times' Lex Column. This is a part one of an edited extract from his new book The Fearful Rise of Markets, published by the FT Press.

Monday

In part two, John Authers looks at the possible solutions to the problems that have arisen since the advent of the global financial crisis.

troy2000 · #2 05-31-2010, 01:00 AM

Well, I've watched in amazement over the years as houses in California became objects of speculation, and their prices became totally disconnected from their supposed function as family shelter.

But I guess it isn't really anything that new. I remember a story I heard forty years ago in San Diego, about a gal buying a small house on Coronado Island--even though it faced an alley and had no street frontage. Then she started having second thoughts.

That evening at a cocktail party she was talking to a realtor, and mentioned that she was uneasy about her purchase. The realtor told her, "don't worry about it; there's no way you can get stuck with a house in today's market. As a matter of fact, one of my friends just unloaded one on some sucker today, and it's a worthless little shack facing an alley--with no street frontage!"

masalai · #3 06-01-2010, 05:02 AM

Well well some people are waking up at last... Keep your eyes open as there is lots more "incoming" ready to blow your assets to smithereens over the next year or so.... Bon chance...

WestVanHan · #4 06-01-2010, 08:09 PM