Follow Up on Turning Point

Well, that was interesting. When I was writing at 4:30 AM yesterday, I was not aware that Shanghai had dropped nearly 9%. I do recall however what made me place a high probability on the idea that US Equity markets were in the temporal proximity of a top in prices. I think it was on the 16th that I first started reading coverage about credit problems at financial institutions that originate mortgages and that the larger banks that bought these mortgages and package them up into securities were putting some of them back to the originating institutions when able to do so because the terms of their deals allowed it (for instance, in cases where the loans become non-performing shortly after they are made).

Over the winter, I read a couple of books about market manias: Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor and Manias, Panics, and Crashes: A History of Financial Crises by Charles P. Kindleberger. A major theme is that speculative excesses get wrung out when there is a credit crunch. What is happening in the case of the mortgage industry is probably not a credit crunch per se, but raises the probability that one may develop.

The proximate cause of the compressed decline in stocks around the world yesterday was the huge decline in Shanghai. Two of the causes of the decline in Shanghai were recent increases in reserve requirements by the Chinese Central Bank and rumors regarding capital gains taxes. In the cycle of greed and fear, fear briefly gained the upper hand in a world that strangely seems to have forgotten about it. The world learned a bit about fear and uncertainty yesterday and will relearn it at some point in the not too distant future.

One Response to “Follow Up on Turning Point”

  1. David Bergerson Says:

    SOX legislation seems to have forced companies into changing their behavior (law of unintended consequenses now invoked).
    Recent M&A and privatizations have been in an effot to reduce cost of regulatory compliance. Coupled with massive
    sharebuyback programs have both fueled the recent rally in equities.