Bubbles, Bubbles everywhere

Bubble, Bubble, Who's in Trouble?
Worried investors are hunting for safe havens. But with so many bubbles about, it's anyone's guess which way to turn

"Too many bubbles, too many potential busts—that's what's confusing the global financial markets these days. Housing markets are sky-high from Boston to Shanghai. Stock prices in India and Russia have roughly doubled in two years, with emerging markets such as Turkey, Indonesia, and Argentina not far behind. Prices for copper, oil, and aluminum have enjoyed equally outsize gains."

"In this world of bubbles, investors see central banks armed with giant pins they're prepared to use."

"The Bank of Japan and the European Central Bank are tightening monetary policy as well, depriving markets of the low-cost capital that helped fuel the global booms."

"But for ordinary investors and big institutions trying to place their bets, there's a big unanswered question: Which bubble or bubbles are going to pop, and which ones will prove sustainable?"

"If housing prices plunge in the U.S., will the ensuing economic collapse be limited to the U.S. or spread worldwide?"

Dow plunge erases 2006 gains

Share markets around the world are still trying to come to terms with a number of issues including rising inflation, interest rates and energy prices, reduced liquidity and appetite for risk.
Stocks Plunge on Mixed Inflation Signals; Dow Tumbles 86 Points, Erasing 2006 Gains

"Wall Street resumed its retreat with another session of steep losses Tuesday as declines in oil and gold prices did little to calm anxiety over inflation. The selloff erased the Dow Jones industrial average's gains so far in 2006."

"The Dow tumbled 86.44, or 0.8 percent, to 10,706.14, after losing nearly 100 points on Monday. The Dow is now down 0.11 percent for 2006."

"Overseas stock markets continued suffering from concerns that rising interest rates will U.S. demand for foreign-made products. Japan's Nikkei stock average plunged 4.14 percent to a two-year low, and stocks in India slid 4.4 percent to a 52-week low."

"Elsewhere overseas, Britain's FTSE 100 lost 1.8 percent, Germany's DAX index sank 1.92 percent and France's CAC-40 was lower by 2.24 percent."

The 1929 crash

The roaring twenties saw great prosperity with a booming economy driven by industrialization and technology. People from all walks of life invested their new found wealth in the stock market. As the market steadily grew and gathered momentum, more and more individuals were drawn in, tempted by quick profits. Easy money fuelled the boom with amateur investors using margin loans and extreme leverage to finance increasingly risky stock and mutual fund purchases.

With speculation rampant throughout all levels of society, the Federal Reserve raised interest rates several times in 1929 to try and slow the economy. The 24th of October 1929 saw the beginning of the crash as panic selling gripped the stock market. As almost every investor tried to sell, there was nobody left to buy, causing the market to plunge. The Dow Jones Industrial Average index continued falling from a peak of 381.17 until bottoming out to 41.22 in July 1932 for a loss of approximately 90%.



Interestingly not everybody lost during this event, Jesse Livermore who became known as the 'boy plunger' made over 100 million dollars profit by shorting stocks on the day of the crash, he went on to become a legendary figure on Wall Street.

The great depression followed the crash, lasting from 1929 to the mid 1930's. Millions lost their life savings, even those not directly invested in the stock market were affected as many banks lost depositors funds. Others committed suicide by jumping out of windows, unable to cope with margin calls and the realization that they had lost everything. The Dow Jones eventually did recover, it took 25 years to make up the lost ground and surpass the 1929 high.

Market Crash
http://mktcrash.blogspot.com/

Golden age of liquidity is drying up

Around the Markets: Golden age of liquidity is drying up

"Liquidity surged in the past decade, fueled by relaxed monetary policies by central banks, globalization, new technologies and such exotic financial instruments as derivatives. They in turn drove down interest rates and bond yields and encouraged investors to pump more money into riskier assets, propelling stock markets."

"No more."

"Rising inflationary expectations, growing political risks and, most especially, actual and anticipated increases in interest rates are combining to make investing and speculation more expensive."

""The era of underpriced capital in constant supply is ending," said David Roche, president of Independent Strategy, a global economic and financial consulting firm in London. "The global cost of capital is rising, and risk appetite will diminish." He warned that if liquidity kept shrinking, it would "squeeze asset prices and damage economic growth.""

""The sell-off in risky assets is a sign that global excess liquidity, which has been buoyant for many years, has finally begun to shrink," said Joachim Fels, chief fixed-income economist at Morgan Stanley in London."

"Both the 1994 crash in the bond market and the bursting of the technology bubble in 2000 were preceded by sharp contractions in excess liquidity"

What are emerging markets telling us?

Are You Panicking Over the Emerging-Markets Slide?

"Fears Over Interest Rates Send Emerging Markets Tumbling"
"Dealing on Indian Exchange Suspended"
"Worst Emerging Markets Run Since Russian Default"

"These alarming reports, which appeared in the May 23 editions of The Wall Street Journal and Financial Times, indicate the depth of the slide in emerging markets around the world. And while those items referred to a single day's carnage, the decline has been going on for weeks now."

This article got me thinking that the sharp falls in emerging and secondary markets in the past week or so are probably due to reduced levels of liquidity and hot money closing out secondary positions to maintain their core holdings. Hedge funds have long been blamed for causing stock market volatility by quickly moving around money chasing gains or fleeing falls. As volatility continues, one would expect most fund managers to continue doing so, exacerbating market moves. The secondary markets are usually the ones to react first and give clues as to the direction of the 'tide' of money and mood of investors or market makers. Perhaps they are sending ominous signals.

Market Crash
http://mktcrash.blogspot.com/

Stock market volatility continues

Global interest rate fears and uncertainty over economic growth prospects are beginning to take their toll on share markets the world over. Last week was particularly brutal with sharp declines across all major indexes across the globe. This volatility appears to be continuing this week with more heavy falls already underway.

Ten days that shook the world's markets

"From Stockholm to Tokyo, New York to Istanbul, market mayhem swept across the world last week, unleashing violent movements on stock markets and foreign exchanges everywhere, and hammering down the price of commodities such as copper and gold."

"Stephen Lewis, of bankers Insinger de Beaufort, says it's too early to write off the risk that the events of the past few days could be the trigger for a full-blown financial crisis. 'Volatility rises, to the extent that it has in equity and commodity markets in recent days, when emotions take over; when actions in the markets are forced; when survival is at stake. In such circumstances, there can be no reliable forecasts of how far markets will move,' he warned."

"The worldwide wobble started with the dollar. A warning from G7 finance ministers last month about imbalances in the global economy, and a hint from Federal Reserve chairman Ben Bernanke that he might halt the rise in interest rates, brought the greenback bears out of hiding, and triggered a frenzy of selling."

"Through the fog of market panic last week, analysts said it was important not to forget the underlying economic causes of the upheaval. For several years now, economists have been watching with growing alarm as the US spent more than it earned, running up a record current account deficit with the rest of the world - worth almost 7 per cent of GDP last year."

"This economic story will play out over months, not at the breakneck speed of the financial markets, and it is hard to predict how its ramifications will ripple across the world. 'There's no new trend established yet,' said HSBC's Bloom. 'It's an unsettled time.' But Bernanke, whose hands are on the world's most important economic lever, will have to hope he isn't forced to win the confidence of the markets the way his predecessor, Alan Greenspan, did - by stepping in to stop the stock market crash of 1987 turning into a global financial crisis."

Caution on Hedge Funds

Plenty of debate in recent times regarding the unchecked growth of hedge funds and their potential to cause major disruptions to the financial system. It seems that we have not yet learned the lessons from the LTCM collapse.

Bernanke Urges Caution on Hedge Funds

"Financial authorities must stay attuned to any potential risks posed by the growth of hedge funds, an investment domain of the wealthy that has become more popular with smaller investors, Federal Reserve Chairman Ben Bernanke suggested Tuesday."

""Authorities should and will try to ensure that the lapses in risk management of 1998 do not happen again," Bernanke said, referring to the collapse of Long-Term Capital Management, a hedge fund that had received a $3.6 billion private bailout."

"Today some 7,000 to 9,000 hedge funds in the United States command an estimated $1 trillion in assets and are believed to account for as much as 20 percent of all U.S. stock trading."

"Hedge funds - high-risk, largely unregulated and secretive investment pools - have traditionally been the investment domain of the wealthy but have become popular with small investors in recent years."

"The Fed chief suggested that financial institutions and others that do business with hedge funds make sure they are doing all they can to sufficiently blunt their risks. "Continued focus on counterparty risk management is likely the best course for addressing systemic concerns related to hedge funds," Bernanke said."