Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Silver Is Close To Something Big - 2nd Mar 21
Bitcoin: Let's Put 2 Heart-Pounding Price Drops into Perspective - 2nd Mar 21
Gold Stocks Spring Rally 2021 - 2nd Mar 21
US Housing Market Trend Forecast 2021 - 2nd Mar 21
Covid-19 Vaccinations US House Prices Trend Indicator 2021 - 2nd Mar 21
How blockchain technology will change the online casino - 2nd Mar 21
How Much PC RAM Memory is Good in 2021, 16gb, 32gb or 64gb? - 2nd Mar 21
US Housing Market House Prices Momentum Analysis - 26th Feb 21
FOMC Minutes Disappoint Gold Bulls - 26th Feb 21
Kiss of Life for Gold - 26th Feb 21
Congress May Increase The Moral Hazard Building In The Stock Market - 26th Feb 21
The “Oil Of The Future” Is Set To Soar In 2021 - 26th Feb 21
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21
US House Prices Momentum Analysis - 20th Feb 21
The Most Important Chart in Housing Right Now - 20th Feb 21
Gold Is the Ultimate Reserve Asset - 20th Feb 21
Is That the S&P 500 And Gold Correction Finally? - 20th Feb 21
Technical Analysis of EUR/USD - 20th Feb 21
The Stock Market Big Picture - 19th Feb 21
Could Silver "Do a Palladium"? - 19th Feb 21
Three More Reasons We Love To Trade Options! - 19th Feb 21
Here’s What’s Eating Away at Gold - 19th Feb 21
Stock Market March Melt-Up Madness - 19th Feb 21
Land Rover Discovery Sport Extreme Ice and Snow vs Windscreen Wipers Test - 19th Feb 21
Real Reason Why Black and Asian BAME are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 19th Feb 21
New BNPL Regulations Leave Zilch Leading the Way - 19th Feb 21
Work From Home Inflationary House Prices BOOM! - 18th Feb 21
Why This "Excellent" Stock Market Indicator Should Be on Your Radar Screen Now - 18th Feb 21
The Commodity Cycle - 18th Feb 21
Silver Backwardation and Other Evidence of a Silver Supply Squeeze - 18th Feb 21
Why I’m Avoiding These “Bottle Rocket” Stocks Like GameStop - 18th Feb 21
S&P 500 Correction Delayed Again While Silver Runs - 18th Feb 21
Silver Prices Are About to Explode as Stars are Lining up Like Never Before! - 18th Feb 21
Cannabis, Alternative Agra, Mushrooms, and Cryptos – Everything ALT is HOT - 18th Feb 21
Crypto Mining Craze, How We Mined 6 Bitcoins with a PS4 Gaming Console - 18th Feb 21
Stock Market Trend Forecasts Analysis Review - 17th Feb 21
Vaccine Nationalism Is a Multilateral, Neocolonial Failure - 17th Feb 21
First year of a Stocks bull market, or End of a Bubble? - 17th Feb 21
5 Reasons Why People Prefer to Trade Options Over Stocks - 17th Feb 21
The Gold & Gold Stock Corrections Are Normal - 17th Feb 21
WARNING Oculus Quest 2 Update v25 BROKE My VR Headset! - 17th Feb 21
UK Covid-19 Parks PACKED During Lockdown Despite "Stay at Home" Message - Endcliffe Park Sheffield - 17th Feb 21
How to Invest in ETFs in the UK - 17th Feb 21
Real Reason Why Black and Asian Ethnic minorities are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 16th Feb 21
THE INFLATION MEGA-TREND QE4EVER! - 16th Feb 21
Gold / Silver: What This "Large Non-Confirmation" May Mean - 16th Feb 21
Major Optimism for Platinum, Silver, and Copper - 16th Feb 21
S&P 500 Correction Looming, Just as in Gold – Or Not? - 16th Feb 21
Stock Market Last pull-back before intermediate top? - 16th Feb 21
GAMESTOP MANIA BUBBLE BURSTS! Investing Newbs Pump and Dump Roller coaster Ride - 16th Feb 21
Thinking About Starting to Trade This Year? Here Are Some Things to Keep in Mind - 16th Feb 21
US House Prices Real Estate Trend Forecast Review - 15th Feb 21
Will Tesla Charge Gold With Energy? - 15th Feb 21
Feeling the Growing Heat and Tensions in Stocks? - 15th Feb 21
Morgan Stanley Warns Gasoline Industry Is About to Become Totally Worthless - 15th Feb 21
Debts Lift Gold - Precious Metal Prices Will Rise on a Deluge of Red Ink - 15th Feb 21
Platinum Begins Big Breakout Rally - 15th Feb 21
How to Change Car Battery Without Losing Power, Memory, Radio Code Settings - 15th Feb 21
Five reasons why a financial advisor can make a big difference to your small business - 15th Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Capital and Debt Markets Crisis- Investors Four Critical Questions

Stock-Markets / Credit Crisis 2008 Mar 06, 2008 - 03:22 PM GMT

By: Doug_Wakefield

Stock-Markets Best Financial Markets Analysis ArticleDoes tracking the major US equity markets give us a full grasp of the amount of risks in our capital markets?
Absolutely not. Consider this: Over the last 14 months, from the end of 2006 to the last day of February of 2008, the Dow Jones Industrial Average and the NASDAQ 100 are only down 1.58% and .63%, respectively. But, if we look at some of the major SECTORS of our economy, we get a different picture. For example, over the same timeframe, the retail index ($RLX) is down 22.85%, the housing index ($HGX) is down 42.55%, the brokerage index ($XBD) is down 24.90%, and the banking index ($BKX) is down 29.91%, while the healthcare index ($HCX) is only down 2.32%. So, four major areas of our economy are down substantially, and neither the Dow nor the NASDAQ 100 has reflected this reality.


This could be one of the reasons why many trading strategies will fail; they don't recognize how misaligned the major equity markets are with the real economy, so they may not be prepared. Also, if the economic sectors that have not come down hard are fundamentally driven by business and personal spending, and that spending is driven by the amount of credit people are willing to take, then the areas of our economy and markets that have yet to be affected, will soon join the rest of the economy in a general decline.

What do you think is one of the biggest risks to traders and investors right now?

Their own biases as formed by their experiences. I remember going to New Orleans a couple of times over the last 20 years – before Katrina. When I left the downtown area and headed back to the airport, it amazed me to see the number of houses that were lower than the level of the highway. The only thing keeping them from flooding, were the levees. In hindsight we can see that if they had a major storm, with an enormous amount of rain, this could be a huge problem. When interviewers asked those who stayed why they did so, I was amazed by their responses. In so many words they stated, “We had been through a lot of storms, and nothing that bad had ever happened, so we decided to stay put.” We are wired in such a way that the only warnings we are inclined to act upon, are those that will help us avoid things we have personally experienced. One could even say, “The only things that are real to us are those that we have experienced.” And that's the point: the only thing most New Orleans' residents had experienced were dire warnings and minimal consequences. All because it had never happened to them before.

In science, we call these rare events fat tails. We know they're out there, but because they happen so infrequently, most people don't spend time studying fat tail events or their similarities. Those that do could be labeled as “gloom or doomers” by their colleagues. But, when we study nature, fat tails are almost always occurring somewhere on some level. As long as we live in Idaho, Katrina is just a news story. But if we run a business in New Orleans, it's our life.

What do you think is the root problem of all of this?

In a word – debt . In the early 1970s, after the US dollar was removed from the gold exchange standard – a standard that was supposed to limit the amount of debt the system could create – the dollar drew its “stability” by being tied to oil. Since then our system has become progressively less stable and the global markets have seen more fat tail events occur. This is partly due to the fact that the system has never been allowed to return to equilibrium, which all systems seek. The solution was always the same. We solve today's debt crisis by creating more debt – more government bailouts. Consequently, the next future financial structure becomes even less stable. As fear sets in, borrowers and lenders become less inclined to play their respective roles, and the inflationary policies and schemes that attempt to thwart the natural forces of unwinding are eventually overridden.

Without realizing that the foundation upon which our money is built has changed every few decades, since the creation of the Federal Reserve in 1913, many bulls and bears mistakenly believe that the Fed is all-powerful. Specifically, it appears that most people have come to believe that the Fed will always be able to “print” more money to get us out of our current crisis. To them, every rate cut or short-term loan is a sign that inflation will continue unabated into the foreseeable future. Thinking that the Fed will always take care of any problems we encounter, millions of bulls have been lulled into thinking that studying monetary and banking history is useless. And though the bears are typically more aware of monetary history, they have come to believe that central bankers' expansionary policies will continue with no end in sight. We fail to recognize the markets' signals since July of 2007, suggesting that the rate cuts and government bailouts are not working.

As we look at various capital and debt markets over the last eight months, do we see signs of more or less confidence? Are we seeing smoother monetary flows between buyers and sellers in our debt markets, or a breakdown – literally at the operational level – in some of our debt markets? Is this normal? If we study market history, how often does this type of action precede major downward moves in equity prices? If consumers and businesses continue to reduce spending and cut debt, what effect will cutting rates and offering short term loans have on the markets? What will happen when the current petrodollar, just like the gold exchange dollar prior to August 1971, no longer exists?

While some might look at all this with more than a bit of skepticism, I draw my conclusions from vast amounts of reading. And from what I've read, it is obvious that those at the highest levels of finance, central banking and politics have given this a great deal of thought. This is not to suggest that we should all go back to sleep and leave the “driving to… them .” Rather, as quickly as possible, we should start learning about how to place the odds in this financial game more in our favor. After spending more than 8000 hours researching, reading, and writing, since 2003, I am convinced that the structural problems we have noticed in our markets and economies in the last few months are endemic. I would say that the odds of a significant downward adjustment in global equity prices during the next 90 to 180 days are extremely high. Science, history, and crowd psychology show hundreds of parallels to previous moments in history.

What would you encourage every investor to do right now?

Understand that science and crowd behavior are ten times stronger than any academic or fundamental argument. When panic and fear set in, the psychology of the crowd will crush those in its path without regard for past performance, prestige or degrees. If you do not respect these powers, your very career and portfolio will bear the brunt of the damage. This is the stuff of fat tail events.

Clinging to false ideas of investing and history proved detrimental during the 2000 to 2002 decline, not only crushing my clients and my portfolios, and my income, but my image of myself. From studying historic declines what grieves me the most, is knowing that as equity markets re-price themselves to correspond with the real world of banking, real estate, and retail spending, thousands of professionals are going to suffer a similar fate. So, until they understand where we are in history, I encourage advisors and investors to find the safest havens of cash to hold their funds.

Traders must remember that all the major equity markets around the world are below their 2007 highs. All good traders know that trends come to an end. So if you have recently been making money rapidly from areas of the markets that have been moving almost straight up, would it not make sense to develop an exit strategy to lock in gains at some point? Shouldn't we be watching for the end of the trend and developing our strategies accordingly?

If you're interested in what various experts, from a variety of disciplines, have to say about finance, you should consider becoming a part of The Investor's Mind and benefiting from the research and views of some of the most experienced individuals in the world of money. To get a feel for the educational material we've presented to our readers since January of 2006, click here . We continue to gain recognition for our 154-page industry paper on short selling, Riders on the Storm: Short Selling in Contrary Winds , which can be obtained with a subscription to The Investor's Mind. To learn more about our mission, as well as our educational and advisory services, visit our website .

By Doug Wakefield with Ben Hill

President
Best Minds Inc. , A Registered Investment Advisor

Copyright © 2005-2008 Best Minds Inc.

Best Minds, Inc is a registered investment advisor that looks to the best minds in the world of finance and economics to seek a direction for our clients. To be a true advocate to our clients, we have found it necessary to go well beyond the norms in financial planning today. We are avid readers. In our study of the markets, we research general history, financial and economic history, fundamental and technical analysis, and mass and individual psychology.

Disclaimer:  Nothing in this communiqué should be construed as advice to buy, sell, hold, or sell short. The safest action is to constantly increase one's knowledge of the money game. To accept the conventional wisdom about the world of money, without a thorough examination of how that "wisdom" has stood over time, is to take unnecessary risk. Best Minds, Inc. seeks advice from a wide variety of individuals, and at any time may or may not agree with those individual's advice. Challenging one's thinking is the only way to come to firm conclusions.

Doug Wakefield Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules