U might have surely cme across some advertisement or salesman stating the XYZ MUTUAL FUND is BEST as it is consistenly outperforming the SENSEX and sure to give a high NAV....
A Simple study of existing mutual funds will find that mutual funs,on average, outperform there benchmarks..
But the problem in such Claims is SURVIVORSHIP....
In reality, only well performing funds continue to survive,while the underperformers die..Thus, the sample of existing mutual funs will not contain funds that underperformed and died...If all funds, dead and alive , are included in the sample than the funds, on average, do not outperform there benchmarks. The sample of existing mutual funds has as SURVIVORSHIP BIAS and will result in an overestimation of fund performance...
SO BE WARY of such claims.. and invest Ur money WISELY...
Sunday, March 14, 2010
Friday, January 15, 2010
HAPPY NEW INVESTMENT DECADE
There is an exceptionally intersting article in Forbes India magzine about the investment scenerio,outlook ,strategy in 2010 and for future in general.. A must read for anyone who is serious about investing..
Key Highlights:
1.History has shown that economic disasters are often followed by a quick recovery, and then, a slower, less dramatic but more devastating crisis.in 1929 and 1978.. Is the same going to happen in 2010 ? considering the present rally with no substantial reason.. I would think so...
2.For the investor, the choice is clear. Putting your money behind a growth of 7 percent a year seems to be a low-risk bet. The growth could be much higher if you pick the right asset classes and the right securities to play them. The payoff might take three to five years to come, but is sure to be as big as the fuel tank of a Hero Honda motorcycle.
If you fill it, shut it and forget it, you won’t have to be scared of 2010.
Have a look at this article
Key Highlights:
1.History has shown that economic disasters are often followed by a quick recovery, and then, a slower, less dramatic but more devastating crisis.in 1929 and 1978.. Is the same going to happen in 2010 ? considering the present rally with no substantial reason.. I would think so...
2.For the investor, the choice is clear. Putting your money behind a growth of 7 percent a year seems to be a low-risk bet. The growth could be much higher if you pick the right asset classes and the right securities to play them. The payoff might take three to five years to come, but is sure to be as big as the fuel tank of a Hero Honda motorcycle.
If you fill it, shut it and forget it, you won’t have to be scared of 2010.
Have a look at this article
Wednesday, January 13, 2010
What is FPO(Follow-on Public Offer)
What is FPO?
A Follow-on Public Offer (FPO) is also called further public offer. When a listed company comes out with a fresh issue of shares or makes an offer for sale to the public to raise funds it is known as FPO. In other words, FPO is the consequent issue to the public after initial public offering (IPO). The word FPO came into news after the YES Bank announcement to raise Rs 2,000 crore through FPO and debt.
How is it different from an IPO?
As the name suggests initial public offering (IPO) is the first offer for purchase to public. This is a process when an unlisted company raises funds by offering its shares to the public and consequently gets listed on a stock exchange. However, if the same company comes out with another issue to the public, the second issue would be called an FPO. For instance, ICICI Bank was a listed entity but came out with FPO of around Rs 8,750-crore equity shares in July 2007. The issue remained open for subscription between July 19, 2007, and July 22, 2009. Similarly Bharat Earth Movers (BEML), which was listed in National Stock Exchange on November 5, 2003, came out with a public offer of 49 lakh shares in 2007. Shares of BEML were issued at Rs 1,075 after the closure of the FPO.
Under the Fast Track Issues (FTI), a listed company, which meets certain entry norms, can proceed further with FPOs by filling a copy of RHP to regulators. These companies don’t need to file a draft offer document. However, it is mandatory for a private company, which wants to come out with an IPO.
What are the other kinds of issues through which companies raise money?
Apart from IPO and FPO, a company can raise funds through a rights issue and private placement. A rights issue and bonus issue are made to the existing shareholders. However, a rights issue is also a way to raise funds but in a bonus issue new securities are issued to existing shareholders without any consideration.
A Follow-on Public Offer (FPO) is also called further public offer. When a listed company comes out with a fresh issue of shares or makes an offer for sale to the public to raise funds it is known as FPO. In other words, FPO is the consequent issue to the public after initial public offering (IPO). The word FPO came into news after the YES Bank announcement to raise Rs 2,000 crore through FPO and debt.
How is it different from an IPO?
As the name suggests initial public offering (IPO) is the first offer for purchase to public. This is a process when an unlisted company raises funds by offering its shares to the public and consequently gets listed on a stock exchange. However, if the same company comes out with another issue to the public, the second issue would be called an FPO. For instance, ICICI Bank was a listed entity but came out with FPO of around Rs 8,750-crore equity shares in July 2007. The issue remained open for subscription between July 19, 2007, and July 22, 2009. Similarly Bharat Earth Movers (BEML), which was listed in National Stock Exchange on November 5, 2003, came out with a public offer of 49 lakh shares in 2007. Shares of BEML were issued at Rs 1,075 after the closure of the FPO.
Under the Fast Track Issues (FTI), a listed company, which meets certain entry norms, can proceed further with FPOs by filling a copy of RHP to regulators. These companies don’t need to file a draft offer document. However, it is mandatory for a private company, which wants to come out with an IPO.
What are the other kinds of issues through which companies raise money?
Apart from IPO and FPO, a company can raise funds through a rights issue and private placement. A rights issue and bonus issue are made to the existing shareholders. However, a rights issue is also a way to raise funds but in a bonus issue new securities are issued to existing shareholders without any consideration.
Saturday, January 9, 2010
OPEX & CAPEX..
Heard this terms many times here & there!!and got baffeled as to wat it is??
or went through financials of a stock and could not figure out difference between operational & capital exenditure?? :)
Just a simple explanation is below:
OPEX:
i.e. operating expense, operating expenditure, operational expense, operational expenditure
OPEX is an ongoing cost for running a product, business, or system
CAPEX-- Its counterpart, a capital expenditure (CAPEX), is the cost of developing or providing non-consumable parts for the product or system.
For example, the purchase of a photocopier is the CAPEX, and the annual paper, toner, power and maintenance cost is the OPEX.
this is the money the business spends in order to turn inventory into throughput.
On an income statement, "operating expenses" is the sum of a business's operating expenses for a period of time, such as a month or year.
Operating expenses include :
1.accounting expenses
2.license fees
3.maintenance and repairs
4.advertising
5.supplies
6.attorney fees and legal fees
7.utilities, such as telephone
8insurance
9.property taxes
10.travel and vehicle expenses
11.salary and wages
12.raw materials
Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life that extends beyond the taxable year.
Capex are used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings. Capex is commonly found on the Cash Flow Statement as "Investment in Plant Property and Equipment" or something similar in the Investing subsection.
Included in capital expenditures are amounts spent on:
1.acquiring fixed assets
2.fixing problems with an asset that existed prior to acquisition
3.preparing an asset to be used in business
4.legal costs of establishing or maintaining one's right of ownership in a piece of property
5.restoring property or adapting it to a new or different use
6.starting a new business
or went through financials of a stock and could not figure out difference between operational & capital exenditure?? :)
Just a simple explanation is below:
OPEX:
i.e. operating expense, operating expenditure, operational expense, operational expenditure
OPEX is an ongoing cost for running a product, business, or system
CAPEX-- Its counterpart, a capital expenditure (CAPEX), is the cost of developing or providing non-consumable parts for the product or system.
For example, the purchase of a photocopier is the CAPEX, and the annual paper, toner, power and maintenance cost is the OPEX.
this is the money the business spends in order to turn inventory into throughput.
On an income statement, "operating expenses" is the sum of a business's operating expenses for a period of time, such as a month or year.
Operating expenses include :
1.accounting expenses
2.license fees
3.maintenance and repairs
4.advertising
5.supplies
6.attorney fees and legal fees
7.utilities, such as telephone
8insurance
9.property taxes
10.travel and vehicle expenses
11.salary and wages
12.raw materials
Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life that extends beyond the taxable year.
Capex are used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings. Capex is commonly found on the Cash Flow Statement as "Investment in Plant Property and Equipment" or something similar in the Investing subsection.
Included in capital expenditures are amounts spent on:
1.acquiring fixed assets
2.fixing problems with an asset that existed prior to acquisition
3.preparing an asset to be used in business
4.legal costs of establishing or maintaining one's right of ownership in a piece of property
5.restoring property or adapting it to a new or different use
6.starting a new business
Sunday, January 3, 2010
What caused the Recession??
We hear a lot about recession .. but do we really know how it occurred or What caused it??
Lot of economies are going into recession and trillions of stock values were wiped out. Aside from these, a lot of companies have reduced their earnings with a lot of plant closures and job lay offs.
We often hear the word recession. We’ve watched news that Singapore, Germany, Japan, and New Zealand officially declared recession in their economies. But what is recession? And what caused it?
please find a simple lucid explanation of the same below:
Recession, in economics, is defined as the contraction of an economy’s Gross Domestic Product for at least two consecutive quarters. That means the economy shrank.
We all know that the world’s largest economy is that of the United States. A lot of countries depend on them most especially countries which depend on export products. There’s this popular saying that “when United States sneezes, everybody catches a cold”. This is so true nowadays which is evident in the domino effect of the global financial crisis with a lot of economies caught colds.
What caused the recession? The problem started in the United States with the so-called Subprime Mortgage Crisis. The crisis was triggered by the rise in mortgage delinquencies leading to foreclosure of houses and ultimately a credit crunch leading to a freeze in liquidity.
Wolla... Went above the head.. lets understand this complicated statement in common terms...
Subprime Mortgage are mortgages given to high default risk credit borrowers. A lot of mortgages issued in US are called subprime which means that little or no downpayment was made by the borrowers to buy houses, cars, etc. Some credit were even given to low income families or with bad credit history. Because of the nature of these mortgages, a lot of borrowers defaulted on their loans which led to banks foreclosing securities of these loans including houses, cars, etc.
All these accumulated and led to the “credit squeeze”. There were no more cash available to other borrowers as all these cash were frozen to foreclosed houses with no willing buyers. The tightening of credit led to a slow down of the economy as there were no more loans available to other borrowers which they can probably use as capital in their businesses. Now, this led to a series of events:
Low Demand. Because of the tightening of credit, there was a slow demand of products of these businesses.
Decrease of Profits. Because of low demand, then there was a decrease in profits for these businesses.
Plant Closures. Because of decrease of profits, then companies need to shut down some of their plants to reduce costs. There was also a notable increase in bankruptcy filings.
Job Lay Offs. Because of plant closures and bankruptcy filings, then companies laid off a lot of their employees and unemployment rate rose.
Stock Market Decline. All these series of events led to the rampant fear of stock investors dumping their stocks which led to tremendous wipe outs of stock values.
The United States and other countries are all doing their best to combat this financial crisis by using different strategies including the recent US$700 Billion bail out plan to increase liquidity in the economy. US Treasury is providing millions and billions of loans to ailing companies to sustain this financial crisis and prevent further recessionof other economies.
The current recession have caused some companies to succumb and declare bankruptcy. Two of these companies include Six Flags, the world’s largest theme park and CIT Group, the American commercial and finance company.
What about a more severe type of recession called depression? I did some study specifically on what caused “The Great Depression” in the 1930s.
Lot of economies are going into recession and trillions of stock values were wiped out. Aside from these, a lot of companies have reduced their earnings with a lot of plant closures and job lay offs.
We often hear the word recession. We’ve watched news that Singapore, Germany, Japan, and New Zealand officially declared recession in their economies. But what is recession? And what caused it?
please find a simple lucid explanation of the same below:
Recession, in economics, is defined as the contraction of an economy’s Gross Domestic Product for at least two consecutive quarters. That means the economy shrank.
We all know that the world’s largest economy is that of the United States. A lot of countries depend on them most especially countries which depend on export products. There’s this popular saying that “when United States sneezes, everybody catches a cold”. This is so true nowadays which is evident in the domino effect of the global financial crisis with a lot of economies caught colds.
What caused the recession? The problem started in the United States with the so-called Subprime Mortgage Crisis. The crisis was triggered by the rise in mortgage delinquencies leading to foreclosure of houses and ultimately a credit crunch leading to a freeze in liquidity.
Wolla... Went above the head.. lets understand this complicated statement in common terms...
Subprime Mortgage are mortgages given to high default risk credit borrowers. A lot of mortgages issued in US are called subprime which means that little or no downpayment was made by the borrowers to buy houses, cars, etc. Some credit were even given to low income families or with bad credit history. Because of the nature of these mortgages, a lot of borrowers defaulted on their loans which led to banks foreclosing securities of these loans including houses, cars, etc.
All these accumulated and led to the “credit squeeze”. There were no more cash available to other borrowers as all these cash were frozen to foreclosed houses with no willing buyers. The tightening of credit led to a slow down of the economy as there were no more loans available to other borrowers which they can probably use as capital in their businesses. Now, this led to a series of events:
Low Demand. Because of the tightening of credit, there was a slow demand of products of these businesses.
Decrease of Profits. Because of low demand, then there was a decrease in profits for these businesses.
Plant Closures. Because of decrease of profits, then companies need to shut down some of their plants to reduce costs. There was also a notable increase in bankruptcy filings.
Job Lay Offs. Because of plant closures and bankruptcy filings, then companies laid off a lot of their employees and unemployment rate rose.
Stock Market Decline. All these series of events led to the rampant fear of stock investors dumping their stocks which led to tremendous wipe outs of stock values.
The United States and other countries are all doing their best to combat this financial crisis by using different strategies including the recent US$700 Billion bail out plan to increase liquidity in the economy. US Treasury is providing millions and billions of loans to ailing companies to sustain this financial crisis and prevent further recessionof other economies.
The current recession have caused some companies to succumb and declare bankruptcy. Two of these companies include Six Flags, the world’s largest theme park and CIT Group, the American commercial and finance company.
What about a more severe type of recession called depression? I did some study specifically on what caused “The Great Depression” in the 1930s.
Monday, December 28, 2009
Robert Kiyosaki's New Book: CONSPIRACY OF the RICH
An amzing book by an amazing author.
What I found most amzing about this book is the sheer audacity by which he is challenging BIG SHOTS like bernanke (Fed) , ridiculing president nixon's policies, even Obama.....
Don't miss to go through it.. A must have to empower you with more financial knowledge and happenings around the world....
Its not a GOLD BUBBLE!!!
An article from Forbes states that:
Rational investors are buying gold to hedge against inflation. No speculative mania here.
Gold investors have certainly enjoyed a marvelous year. The price of gold has doubled in the last three years and reached an all-time high in the first week of December 2009. As well as the stock market has done, investment in gold has overperformed the S&P 500 by 10%, and by 34% on a risk-adjusted basis. Is the impressive performance of gold comparable to that of Internet stocks in the 2000s or house prices between 2006 and 2008? Are we experiencing a gold bubble? I do not think so.
Economists assume that the main driver of the price of gold is the stock market. Gold and the stock market have historically been negatively correlated. In 2009, however, this correlation turned positive. The stock market was recovering from the crisis, and gold prices were up because gold is an inflation hedge, and investors--especially governments--were accumulating gold reserves. This extraordinary relationship between the stock market and gold prices is not worrisome because we saw the disarray of most financial markets at the end of 2008; it is just taking time for them to readjust.
If the recovery in stock markets continues, all the money that is now flowing into gold will return to equities. Gold prices will then land softly.
Consequently, the negative correlation between gold and the stock market will be restored, and it will be a great year for stocks, but not for gold.
The second driver of gold prices is the weakness of the U.S. dollar.
Asian economies such as China are challenging the dollar's long-term role as the world's reserve currency by accumulating euro-denominated instruments and gold. This is a pervasive equilibrium happily welcomed by China and the U.S. China is interested in keeping the dollar low so that it can more easily afford its heavy oil bill. China also balances its need for dollar reserves with its reasonable fear of rising inflation in the U.S. by accumulating gold. The U.S. is comfortable with a weaker dollar, which makes its exports cheaper in Europe. For the U.S., this is a perfect equilibrium because the dollar’s premier status guarantees access to foreign capital. The European economies, however, suffer from an overvalued euro, and their own exports to the US are highly priced.
Only a big political event could break this equilibrium. It could all start with oil prices being re-denominated in euros (this was the threat recently made by Venezuelan President Hugo Chavez). China would then replace its dollars with euro reserves, and the trade balance between China and Europe would do the rest: The euro would weaken against the dollar, interest rates in the U.S. would increase, the dollar would appreciate, stock prices would increase and the price of gold would go down. This is unlikely.
It is impossible to say if the stock market or the U.S. dollar most affects the price of gold. It would be a big mistake to interpret the relationship between the U.S. dollar and gold prices in isolation. The global economy is a complex system where all macroeconomic variables such as inflation, bond markets, oil prices, exchange rates, stock prices and commodities are interrelated. The dynamics of this system are completely unpredictable because there can be unexpected shocks of very many different kinds. I hope that we have learned this lesson at least from the 2008 financial crisis.
Is there a gold bubble? If there is one, it is definitely not rational. In a rational bubble, prices deviate from fundamentals because arbitrageurs cannot eliminate mispricing because of a market constraint. This was the case in the housing bubble of the last years, where home prices could not be arbitraged away by short-sellers (naturally, houses cannot be sold short), even though the mispricing had already been identified. The gold market is very liquid, efficient and transparent, and mispricing is easily corrected through gold short positions.
In an irrational bubble, prices of assets increase abnormally because investors ignore intrinsic values. An irrational gold bubble is also unlikely. That gold prices are artificially inflated seems natural because gold is a commodity with a limited supply and it does not have a fundamental value.
Demand for gold in 2009 skyrocketed because of an increase in inflation and because European countries required financing. However, gold trades are dominated by institutional investors and large traders who do not panic easily. As well, China makes the most claims about a gold bubble and is simultaneously accumulating gold reserves, which suggests it has an interest in purchasing cheaper gold. Finally, a bubble is unpredictable by nature and only confirmed ex post.
In the absence of fundamental value, a bubble happens when the price of an asset is extraordinarily high. Whether the current gold price is artificial, only history will tell. The only thing we know for sure is that the price of gold is at a historical maximum, but so was the stock market in 2008, and not as a result of a bubble. Gold is certainly expensive, but it is worth what investors are paying for it.
Rational investors are buying gold to hedge against inflation. No speculative mania here.
Gold investors have certainly enjoyed a marvelous year. The price of gold has doubled in the last three years and reached an all-time high in the first week of December 2009. As well as the stock market has done, investment in gold has overperformed the S&P 500 by 10%, and by 34% on a risk-adjusted basis. Is the impressive performance of gold comparable to that of Internet stocks in the 2000s or house prices between 2006 and 2008? Are we experiencing a gold bubble? I do not think so.
Economists assume that the main driver of the price of gold is the stock market. Gold and the stock market have historically been negatively correlated. In 2009, however, this correlation turned positive. The stock market was recovering from the crisis, and gold prices were up because gold is an inflation hedge, and investors--especially governments--were accumulating gold reserves. This extraordinary relationship between the stock market and gold prices is not worrisome because we saw the disarray of most financial markets at the end of 2008; it is just taking time for them to readjust.
If the recovery in stock markets continues, all the money that is now flowing into gold will return to equities. Gold prices will then land softly.
Consequently, the negative correlation between gold and the stock market will be restored, and it will be a great year for stocks, but not for gold.
The second driver of gold prices is the weakness of the U.S. dollar.
Asian economies such as China are challenging the dollar's long-term role as the world's reserve currency by accumulating euro-denominated instruments and gold. This is a pervasive equilibrium happily welcomed by China and the U.S. China is interested in keeping the dollar low so that it can more easily afford its heavy oil bill. China also balances its need for dollar reserves with its reasonable fear of rising inflation in the U.S. by accumulating gold. The U.S. is comfortable with a weaker dollar, which makes its exports cheaper in Europe. For the U.S., this is a perfect equilibrium because the dollar’s premier status guarantees access to foreign capital. The European economies, however, suffer from an overvalued euro, and their own exports to the US are highly priced.
Only a big political event could break this equilibrium. It could all start with oil prices being re-denominated in euros (this was the threat recently made by Venezuelan President Hugo Chavez). China would then replace its dollars with euro reserves, and the trade balance between China and Europe would do the rest: The euro would weaken against the dollar, interest rates in the U.S. would increase, the dollar would appreciate, stock prices would increase and the price of gold would go down. This is unlikely.
It is impossible to say if the stock market or the U.S. dollar most affects the price of gold. It would be a big mistake to interpret the relationship between the U.S. dollar and gold prices in isolation. The global economy is a complex system where all macroeconomic variables such as inflation, bond markets, oil prices, exchange rates, stock prices and commodities are interrelated. The dynamics of this system are completely unpredictable because there can be unexpected shocks of very many different kinds. I hope that we have learned this lesson at least from the 2008 financial crisis.
Is there a gold bubble? If there is one, it is definitely not rational. In a rational bubble, prices deviate from fundamentals because arbitrageurs cannot eliminate mispricing because of a market constraint. This was the case in the housing bubble of the last years, where home prices could not be arbitraged away by short-sellers (naturally, houses cannot be sold short), even though the mispricing had already been identified. The gold market is very liquid, efficient and transparent, and mispricing is easily corrected through gold short positions.
In an irrational bubble, prices of assets increase abnormally because investors ignore intrinsic values. An irrational gold bubble is also unlikely. That gold prices are artificially inflated seems natural because gold is a commodity with a limited supply and it does not have a fundamental value.
Demand for gold in 2009 skyrocketed because of an increase in inflation and because European countries required financing. However, gold trades are dominated by institutional investors and large traders who do not panic easily. As well, China makes the most claims about a gold bubble and is simultaneously accumulating gold reserves, which suggests it has an interest in purchasing cheaper gold. Finally, a bubble is unpredictable by nature and only confirmed ex post.
In the absence of fundamental value, a bubble happens when the price of an asset is extraordinarily high. Whether the current gold price is artificial, only history will tell. The only thing we know for sure is that the price of gold is at a historical maximum, but so was the stock market in 2008, and not as a result of a bubble. Gold is certainly expensive, but it is worth what investors are paying for it.
Wednesday, December 16, 2009
Wat exactly happened with Financial system in America??
In the USA in 1998, many people decided that real estate was very cheap.
At the same time, Wall Street was making it easier for buyers to get loans.Since most of these loans go to people wanting to buy a house, they come with higher interest rates — even if they’re disguised by low initial rates — and thus higher returns. These mortgages packaged together and bundled into investments, often known as collateralized debt obligations(CDO).
Investors then boosted their returns through leverage. For example they made a $100 million bet with only $1 million of their own money and $99 million in debt(backed by a CDO). If the value of the investment rose to just $101 million, the investors would double their money.
Similarly the American home buyer did the same thing, by putting little money down on new houses. The Fed helped make it all possible, sharply reducing interest rates, to prevent a double-dip recession after the technology bust of 2000, and then keeping them low for several years
All these investments, of course, were highly risky. Higher returns always come with greater risk. People assumed that that the usual rules didn’t apply because home prices nationwide had never fallen before. Based on that idea, prices rose ever higher — so high, that they appeared riduclous when compared with real wages.
Then what happened....
The American home seemed so lucrative and easy money that all the banks in the global financial system ended up owning a piece of it. In a strategy to distribute risk many banks sold complex insurance policies on the mortgage debt. That meant that they would now have to pay up in case the mortgage owner defaults
If that $100 million investment I described above were to lose just $1 million of its value, the investor who put up only $1 million would lose everything.
This is the fear that is crippling the financial market these days. Banks dont seem to think they can lend to each other because no one knows how much a bank is leveraged. Uncertainity is the worst thing for markets so investors are losing confidence. This is bringing down the market.
With so many small investors invested in the market through retirement funds, brokerage accounts this is bound to effect the common man on the street. With a declining net worth and lack of credit it is difficult for the American consumer to purchase products leading to low earnings for non-financial companies.
American markets are caught in this vicious circle and rather than only blaming folks on wall street people must also realize that spending beyond your means always leads to financial trouble.
At the same time, Wall Street was making it easier for buyers to get loans.Since most of these loans go to people wanting to buy a house, they come with higher interest rates — even if they’re disguised by low initial rates — and thus higher returns. These mortgages packaged together and bundled into investments, often known as collateralized debt obligations(CDO).
Investors then boosted their returns through leverage. For example they made a $100 million bet with only $1 million of their own money and $99 million in debt(backed by a CDO). If the value of the investment rose to just $101 million, the investors would double their money.
Similarly the American home buyer did the same thing, by putting little money down on new houses. The Fed helped make it all possible, sharply reducing interest rates, to prevent a double-dip recession after the technology bust of 2000, and then keeping them low for several years
All these investments, of course, were highly risky. Higher returns always come with greater risk. People assumed that that the usual rules didn’t apply because home prices nationwide had never fallen before. Based on that idea, prices rose ever higher — so high, that they appeared riduclous when compared with real wages.
Then what happened....
The American home seemed so lucrative and easy money that all the banks in the global financial system ended up owning a piece of it. In a strategy to distribute risk many banks sold complex insurance policies on the mortgage debt. That meant that they would now have to pay up in case the mortgage owner defaults
If that $100 million investment I described above were to lose just $1 million of its value, the investor who put up only $1 million would lose everything.
This is the fear that is crippling the financial market these days. Banks dont seem to think they can lend to each other because no one knows how much a bank is leveraged. Uncertainity is the worst thing for markets so investors are losing confidence. This is bringing down the market.
With so many small investors invested in the market through retirement funds, brokerage accounts this is bound to effect the common man on the street. With a declining net worth and lack of credit it is difficult for the American consumer to purchase products leading to low earnings for non-financial companies.
American markets are caught in this vicious circle and rather than only blaming folks on wall street people must also realize that spending beyond your means always leads to financial trouble.
Subscribe to:
Comments (Atom)
