The Subprime Mood of Summer 2007

(This was written during the August Market reaction when we were preparing the blog).

What has caused the stock market to suddenly pull back in the August of 07? What are the possible scenarios involved? What will history say about this:

  1. Credit meltdown?
  2. Vanishing liquidity in the markets?
  3. “Predatory lenders” selling mortgages to collect commissions and pass on the loans knowing full well they will never be paid?
  4. Too many computerized hedge funds deep on margin with only 10% collateral, all betting on the same side, facing forced liquidation?
  5. A contracting Real Estate bubble or possibly a beginning of a crash?
  6. Unwinding of the Yen carry trade as the simplest money making game for the last few years?
  7. A 20+ trillion dollars derivatives default bomb that no one seems to exactly understand?
  8. A sudden shift in mass psychology from mass greed to mass fear?
  9. A dollar crisis
  10. A tremor in a bigger global dislocation?

It is said that the five most dangerous words in Wall Street are: “This time it is different.” Every new generation of money managers brings new suckers ready to declare that we are experiencing a new “new economy” that defies the laws of nature. Natural Laws determine that day follows night and night follows day; that after winter comes spring, summer and then the fall; that birth precedes childhood, and then comes youth, adulthood and old age. Stock markets oscillate from over optimism to over pessimism, from mass greed to mass fear, from over valuation to under valuation.

What is different now? Never before have there been so many computerized “black boxes” automating the market based on blind mathematical equations and momentum trends replacing human judgment and decision. Plus, only recent decades of computing advances enabled such a rapid and explosive growth of derivatives. So is this time different? Will the natural oscillation of the market be averted? Probably it won’t. It was said before: “Markets can be irrational longer than you can stay solvent.” Markets can be manipulated in the short term to reflect a distorted picture and computers may create sharper and faster shifts. Primary trends and natural laws may be suspended for only a brief time but cannot be stopped and cannot be changed. It’s difficult, but the best time to buy is when everyone is selling and the best time to sell is when all are buying.

© Aviv Shahar

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