Everyone is a long term investor, until the market tanks.
Showing posts with label panic. Show all posts
Showing posts with label panic. Show all posts
Saturday, April 4, 2015
Friday, February 7, 2014
What is a bubble? aka A Con Game
The global financial crisis of 2007-09 is often described as a bubble bursting. A bubble implies highly inflated prices.
There were highly inflated asset prices, eg. a variety of housing related leveraged debt instruments, but the general equity markets were not overly inflated on either a trailing twelve month or a forward earnings basis. The bursting of the housing bubble (and I would suggest it was also a localized/regional event) was predicated upon a mountain of easy money which in turn led to a run on the financial system and a consequent financial market panic. The real world came to a stop, earnings consequently collapsed and equity valuations in hindsight looked grotesque. What it really highlighted was that the financial system (and the economy) are based substantially upon confidence. The confidence of bankers to lend, investors to invest and business men to make investment decisions. When that confidence disappears in a tightly coupled, complex system all bets are off. That is what we call systematic risk, where one action begets another and feeds upon itself.
There was no one singular cause to the global financial crisis. There were myriad factors and contributors. However, when confidence in the whole system evaporated, it led to panic and an exit from all asset positions.
There were highly inflated asset prices, eg. a variety of housing related leveraged debt instruments, but the general equity markets were not overly inflated on either a trailing twelve month or a forward earnings basis. The bursting of the housing bubble (and I would suggest it was also a localized/regional event) was predicated upon a mountain of easy money which in turn led to a run on the financial system and a consequent financial market panic. The real world came to a stop, earnings consequently collapsed and equity valuations in hindsight looked grotesque. What it really highlighted was that the financial system (and the economy) are based substantially upon confidence. The confidence of bankers to lend, investors to invest and business men to make investment decisions. When that confidence disappears in a tightly coupled, complex system all bets are off. That is what we call systematic risk, where one action begets another and feeds upon itself.
There was no one singular cause to the global financial crisis. There were myriad factors and contributors. However, when confidence in the whole system evaporated, it led to panic and an exit from all asset positions.
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