Monday, September 19, 2011

Fear in the Financial Markets

Here is a bit from a post by by Barry Ritholtz in his The Big Picture blog that spells out how much fear and uncertainty is running among investors:
The credit crisis blew up a mere 3 years ago; the recency effect has investors fearing a replay of that crisis, only centered on European instead of US banks. Bloomberg observes more than $75B in fund withdrawals have been pulled from U.S. equity funds since the end of April (Fund Withdrawals Top Lehman as $75B Pulled). That is more than the five month withdrawal after the collapse of Lehman Brothers. US stocks have lost $2.1 trillion in market cap May 2011.


Hence, our Stew of Negativity is fairly well understood: Start with fears of another 2008 bank crisis; add a new cyclical recession as your two base ingredients of investor’s worries. Season that with the ongoing de-leveraging and the long slow recovery process that typically follows credit crises; add the accompanying housing overhang, merely half way through its rush towards 10 million foreclosures. Salt & Pepper to taste.
Go read the original to get the embedded links.

Human nature is funny. Fear runs highest after the fact. For example, after a terrorist attack you suddenly get police in the streets and people terrified of living their lives. Before the attack, everybody is secure and happy. This is called "closing the barn door after the horses have fled". The danger was before the attack. The safest moments are usually after the attack because that's when security is on high alert. The same is true of the financial markets. Credit is tight right now because banks got burned by their fradulent lending practices before 2008. Before 2008 the joke was that if you could fog a mirror you got a loan. Now, companies that have the business and want to expand, can't get a loan. It is all so hysterically funny. Human nature is so perverse!

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