Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Chinese Tech Stocks CCP Paranoia and Best AI Tech Stocks ETF - 26th Oct 21
Food Prices & Farm Inputs Getting Hard to Stomach - 26th Oct 21
Has Zillow’s Collapse Signaled A Warning For The Capital Markets? - 26th Oct 21
Dave Antrobus Welcomes Caribou to Award-Winning Group Inc & Co - 26th Oct 21
Stock Market New Intermediate uptrend - 26th Oct 21
Investing in Crypto Currencies With Both Eyes WIDE OPEN! - 25th Oct 21
Is Bitcoin a Better Inflation Hedge Than Gold? - 25th Oct 21
S&P 500 Stirs the Gold Pot - 25th Oct 21
Stock Market Against Bond Market Odds - 25th Oct 21
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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