Business & Investments

Write-up by John Reizner

It appears that with each significant market swoon, commentators come out of the woodwork on economic television and speak of systemic risk to the economic markets, typically from hedge fund or complex derivative blow ups, or events from China. I think there is constantly the risk, nonetheless tiny, that such an event could happen and cause a meltdown, and we would be foolhardy to say this would never take place.

But truly, is there such a catalyst now for a catastrophic market place occasion? I believe the catalyst could be either triggered by one particular or much more of four aspects: a hedge fund (s) seizing up, a derivatives transaction gone seriously awry, the level of our public and private debt, or events from Asia, particularly China.

The initial threat element to the soundness of the monetary markets is excessive debt. Sir John Templeton, possibly the greatest global investor of our time, has said that never ever just before has our economic technique been so mired in both public and private debt. Further he has stated that never ever just before has any civilization in history escaped from such levels of debt with out dire consequences for its citizens and the society. We will be faced with a lower standard of living for all our folks if we do not soon address the spending budget deficit and reform the level of future Medicare and Social Security obligations.

When Sir John was alive I picture he was vividly impressed with the catastrophic stock industry crash of 1929 and the deflationary unwinding that occurred for far more than a decade afterward. He has said that an additional crash will definitely happen, but that we can’t know what it will strike. Chairman Bernanke, a student of the Excellent Depression, that era’s moniker, has been reported to think that the Fed could drop funds from helicopters in order to stem off a deflationary spiral such as what occurred throughout the collapse of the 1930′s. (which would be a rather exciting spectacle). A deflationary collapse such as happened in the thirties is possibly the most devastating economic blow that can occur to a society’s economic method.

The second threat element is the behavior of hedge funds in the market. There are now over 8,000 hedge funds managing hundreds of billions of dollars. Hedge funds give a valuable service to the industry by offering liquidity to the marketplace so the rest of us can reliably execute our trades. But a lot of funds use a fantastic deal of leverage in an try to accomplish greater returns. The hedge fund Long Term Capital Management, begun by John Meriwether in 1994, a former Salomon Brothers bond trader, accomplished great returns in its early years, but ran into difficulty in 1998 when the Russian government defaulted on its debt. Returns afterward went negative as a outcome of the consequences of the default. As the firm was utilizing a high level of leverage, their outcomes were severely impacted. A multi billion dollar bailout of the fund had to be organized to avoid a contagion and collapse in the monetary markets.

The third risk element to the markets is derivatives. Derivatives are investment instruments based on underlying assets such as stocks, bonds, commodities, indexes, interest rates, and so on. The derivative can include put and call alternatives, commodity futures, or interest rate swaps, etc. There are opportunities in these instruments to reap huge reward or fantastic loss. There are both publicly traded derivatives and ones traded by private agreement. Warren Buffett was quoted from his March 2003 annual letter about the danger of a miscalculation in complicated derivatives transactions. He stated, “we view them as time bombs, each for the parties that deal in them and the financial system.” This statement is taken from http://www.forbes.com/property_asia/2003/05/09/cx_aw_0509derivatives.html with regards to their opinion of these varied instruments. Both Alan Greenspan and Warren Buffet are concerned that fewer economic institutions are handling derivative transactions, and Buffett has called them “weapons of mass destruction.” Id.

The fourth risk to the economic markets is events from China. The February 2007 Shanghai industry swoon shook the confidence of investors worldwide. We do not yet know how this will play out. The record of the last twenty seven years is good. The industry has recovered ground lost from sudden industry downturns in 1987, 1989, and 1998. The best guidance if you want to hunker down is diversification of assets, and to maintain sufficient assets to cover your debt should the unthinkable take place.

This write-up contains the opinions and suggestions of its author and is designed to offer beneficial info to the reader on the subject matter covered. The author may or might not have present positions in the investments mentioned in this function, and the author might from time to time make investments in a manner that is not described here. Past efficiency is no guarantee or prediction of future outcomes and any investments created, based on the opinions and concepts contained in this operate, could or may possibly not be effective. The methods contained herein may not be suitable for each scenario, and the author is not engaged in rendering legal, accounting, investment advisory or other professional services.

About the Author

My existing e-book, AWay to Wealth – the Art of Investing in Widespread Stocks, is available at my internet site, http://www.ReiznersWay.com.

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