global financial crash yay!
- Thread starter sufi
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crackerjack
Well-known member
FTSE down 75 today, Wall St 200. Not really working, is it? Or maybe this is just a stepping back from last Friday's giddiness.
IdleRich
IdleRich
Oil back up as well and a long way. OK, there may be some factors (other than an international crisis) causing that but it never helps.
But really, is it always good for the stock market to rise? Should that be a goal? Surely it's best if the stock market values companies fairly and or accurately (whatever that might mean)? There is something not right when the value of the top 100 capitalised companies in this country is fluctuating so wildly.
I know what you mean. It's stupid.
On the one hand, you can always argue that the value of these companies isn't bouncing around crazily - what's changing is investors' perception of the net present value of the company's assets and future earnings, which can obviously be a much more volatile thing, especially when you consider that the market feeds upon and magnifies any message coming out of sizeable stock movements.
On the other hand, if you actually want to buy or sell, then the price that the market sets is the price that the market sets. There's no point arguing that Company X is worth 20% less than the market is willing to sell its stock for. No-one's going to sell it to you at that price, even if it is "right".
As we're seeing with MBS and CDOs, I think the market does a decent enough job in "normal" conditions, when there's a balance of factors affecting perceived value and there's a mixture of buyers and sellers. But when the market enters some kind of distressed state, and there's a preponderance of either buyers or sellers, then there ceases to be a strong connection between fundamental value and perceived value. Unfortunately, because the market is what it is, perceived value is the only thing that matters.
Just thinking aloud - but it's interesting to reflect on why the stock market (or even just the stocks belonging to specific industry sectors, like banks) haven't frozen up in the same way that the MBS / CDO market did. The press has blamed it on the complexity of structured credit and its lack of transparency. But is, for example, $100m of shares in Goldman Sachs THAT much easier to value than $100m of senior CDO paper? Can you really be much more comfortable with the prospects of Goldman than the prospects of your CDO? I don't think so. Plus, in an extreme scenario, equity should be riskier than debt - if Goldman's stock goes to zero, you get nothing. If you're a senior bondholder, you'll get some kind of recovery.
I'm guessing that the depth of the equity market is what keeps it relatively "sane": there may be (pulling numbers out of the air) 5,000 institutions globally who would buy CDOs, but there must be hundreds of thousands of investors, retail and institutional, who'd buy bank stocks. It'd be easier for the CDO market to suffer a catastrophic loss of liquidity than for equities to do the same.
Erm ... sorry ... not sure where this is going. Please add your own conclusion.
IdleRich
IdleRich
Yeah, I'm just thiking aloud too.
Why in general is the government willing to help people who have bet one way rather than another? If you subscribe to the idea that long-term the price of a share ought to reflect the value of the oompany then isn't it best if the share price is "right" rather than artificially high? Why is it that selling short is an attempt to force the stock down but buying long isn't an attempt to force the stock up? How do they define market manipulation?
Well, the point I'm making I guess is that if you are an investor you are making a bet that the valuation of a company will increase. There is or ought to be some kind of link between the valuation of the company and how successful (ie profitable) it is. Presumably profitable businesses are to be valued by the government and so a strong stock market may in some way be deemed a good thing. However, short term measures such as banning short selling are in no way increasing the profitability of the underlying company and are merely a way for the government to help those original gamblers to change a losing bet into a winner - why are they so keen to do that? It seems very much a case of treating the symptoms rather than the disease.
Why in general is the government willing to help people who have bet one way rather than another? If you subscribe to the idea that long-term the price of a share ought to reflect the value of the oompany then isn't it best if the share price is "right" rather than artificially high? Why is it that selling short is an attempt to force the stock down but buying long isn't an attempt to force the stock up? How do they define market manipulation?
I'm sure that depth is something to do with it, also familiarity. Also, how often to companies go bankrupt? I mean, it's always a risk but if you stuck a pin in a list of companies on the stockmarket and looked at that a year later it's more than likely it will still be going isn't it?
vimothy
yurp
In fact, isn't this the problem (i.e. bubbles), not the solution?
IdleRich
IdleRich
Yeah, that's what I meant with this bit.
What are the consequences of low share price except that investors lose money? I guess it can be hard to raise money, it can make the company vulnerable to a take over, it means that investors get annoyed and so it can be destabilising, anything else? Why should I care is what I mean? I guess that if all investors start losing money they get annoyed with the government but is that enough reason to bail them out?
vimothy
yurp
Seems like the only solution to asset price bubbles is to encourage more. Lame. Bump up equity prices, make credit easier to obtain, which pushes up asset prices, which makes cerdit easier to obtain, which...
Plus every time the bubble burst the revenues from capital gains (possibly after becoming an asset tax in real terms) drop through the floor, leading to increased government borrowing and reduced spending, then growing fiscal imbalances...
Plus every time the bubble burst the revenues from capital gains (possibly after becoming an asset tax in real terms) drop through the floor, leading to increased government borrowing and reduced spending, then growing fiscal imbalances...
3 Body No Problem
Well-known member
vimothy
yurp
This is good in a non-hysterical kind of way:
Anatomy of the financial crisis -- Barry Eichengreen, VoxEU
Anatomy of the financial crisis -- Barry Eichengreen, VoxEU
Activist equity hedge funds would argue that they do a good job of forcing lazy, incumbent management to think more carefully about shareholder value rather than their own interests. I think that's true in some cases.
Hedge funds which look for arbitrage strategies would argue that they make the markets more rational by identifying inefficiencies and anomalies and taking advantage of them until they disappear. Again, that might sometimes be true. They're certainly not doing it out of a sense of responsibility to their fellow investors, though.
In the post-Enron / post dot-com crash period, when bank lending and financing briefly dried up (especially for energy, telecoms and high-tech companies) hedge funds stepped in and became their principal lenders and financiers - they were pretty much the only people around who were willing to take on credit risk to those sectors at that time. Was that a good thing? Should those companies have gone to the wall? Maybe, but their employees, suppliers and other stakeholders certainly benefited.
Similarly, here in Germany, hedge funds and private equity funds were the first (and only) people on the scene from 2002 onwards when the domestic banking sector was weighed down with bad corporate / real-estate debt. They bought the debt and gave the banks an out which they otherwise wouldn't have had.
Of course, you could find just as many examples of hedge funds making a mess of things - but I do think a defensible argument could be made for them in some ways "oiling the wheels" of the financial system by taking on risks that other people are unwilling to take, and by acting in a contrarian fashion to other investors at times of stress.
IdleRich
IdleRich
A surprisingly pro-regulation link.
Well that's what I used to do for a living but I didn't work for a hedge fund.
Maybe so but how contrarian a position have they taken? Seems (as far as it's been possible to tell) that hedge funds have on aggregate been betting the same way as everyone else this time around doesn't it?
It certainly does - but I'm not suggesting that they always trade contrarian, just that when things go wrong, it's hedge funds and PE funds who re-enter the fray earliest. They're the ones who provide the floor. Lone Star bought up a portfolio from Merrill a month or so ago, and Blackstone said this week that it's also now looking to buy more aggressively. JC Flowers was interested in bidding for Lehman.
Again - not trying to say that hedge funds and PE funds are ace. But they do on occasion have something to offer the system as a whole.
IdleRich
IdleRich
Sure, I don't want to attribute to you an opinion you don't hold and I see what you're saying - just as I'm not totally opposed to hedge funds as a matter of principle. I'm just not sure that they are unique in providing the things that they claim to provide or that they provide them to that the extent that they claim. Hard to know for certain though. Has there been a notable improvement in market efficiency in the era of the hedgefund?