What's your take on the stock markets declining?

Question

It's not just ours.. Japan and Europe as well. Someone give me a more complex answer as to why all this is going on or your thoughtful opinion on it. The news treats us like idiots it seems and I would like a more thorough explanation.

See PJ's answer read much like a newspaper. It seems they tell you the surface and don't explain why things change the market so drastically and why other markets are reacting. Mainstream just states it, doesn't explain it. I always figured media should educate and inform. I'm sorry for offending you and making it sound like I don't read the news. What's important is this matter is that I wondered about it enough to find more info via Yahoo! Answers. Please don't criticize me and keep this a friendly informative question.

Answer 1

Truthfully, as an economist and really one of the best investors in the world, no one knows.

The news needs to report something and if we answered the news with shrugged shoulders they wouldn't be happy.

There are a lot of specific things going on here. The big one is true liquidity crisis. Cash is king as the saying goes. For a long time, private investors were buying subprime mortgages and at very low interest rates, but at interest rates above market rates. The problem with subprime, and alt-A loans, is that we do not know how they will react under stress.

The subprime market is now defaulting on 20% of the outstanding loans. If you are charging a 7% interest rate, that is a huge loss. This should just be a blip on the screen, except these loans are in portfolios and since no one will buy them, their price is effectively $0.00. If you owe hundreds of millions of dollars, have no cash on hand, cannot sell your mortgages, then you start selling anything you can sell to meet cash needs because lenders are getting jittery and demanding either repayment or additional collateral.

That is the public story.

Now the rest of the story.

The US stock market is way overvalued, especially under inflationary expectations and considering the level of global uncertainty, but prices in markets are rarely rational, they are just the result of bidding. Many institutional investor s are seeking liquidity or alternative higher yielding investments in other global markets.

Additionally, this White House has way overspent. The last time the US was this indebted to foreign governments was the Civil War, but Bush would never have been able to meet his campaign promises on our money alone. He promised things America actually doesn't have the money to buy, but he bought it anyway.

To add to the pain, the average US citizen is indebted substantially to the People's Republic of China. China has been happily loaning $1 billion per day to keep America floating. About three months ago they said it is time to "diversify their foreign holdings." In other words, the party is over.

And, as if we needed more, the current retirement commitments of the US Government exceed the present value of all private assets in the United States. In other words, under this administration they have not only mortgaged the entire nation, but extra. There is a nice set of papers by Gokhale on intergenerational obligations.

And, then you have simple panic. Stock prices are Cauchy distributed. To put that in ordinary terms, stock prices swing far wider than a normal distribution ever would and we experience a "normal" world. When it stops behaving normally we either get excited (in an asset bubble) or panicked (as in a crash). People are afraid and there is a lot of money to be made in fear. Stocks are gyrating in weird ways. Weird stocks make huge gains and weird stocks crash. Stocks that should not move together are now moving together and stocks that should move together have stopped doing so.

And these are just observations, not reasons. There are no reasons. It just is. We live in a global society now. If you think as an American, you are missing the point. Borders mean far less than they ever did among the developed nations. A crisis anywhere is a crisis here.

Oh yes, and I left out risks to the energy supply and Iraq/Iran and of course our beloved leader W. And these are just the issues going on on the surface. How many people out there are cashing in money to have money for health care, but we cannot see them doing it. It is easy to attribute stock movements to big macro events, but the real answer is that millions of small transactions are occurring simultaneously and the stock market is the residual of left over money not put in the bank and not eaten, driven, slept under, slept on or slept with.

Answer 2

There are many explanations but few real answers. The fact is, no one knows exactly why the markets do what they do. It's just too complicated to figure out. Everyday the talking heads give reasons why the market did what it did but it's just talk.

The crucial thing President Bush said yesterday was:
"Another factor one has got to look at is the amount of liquidity in the system. In other words, is there enough liquidity to enable markets to be able to correct? And I am told there is enough liquidity in the system to enable markets to correct.”

The key phrase is "to enable markets to correct." That means this current correction will continue but that the "plunge protection team" at the Treasury and the Fed will prevent a crash (by buying stock futures). So expect lower-to-sideways prices for the next few weeks or months.

Every excess -- and there is still plenty of excess in the the system as the result of derivatives and asset-backed securities built on below-investment-grade assets like subprime loans -- has to be purged from the system, sooner or later. The question is whether the purgative will upset the whole system and cause a prolonged period in which no one in the market makes money. If you're young you can ignore that kind of thing. If not, you need to be alert to those times when "cash is king."

Answer 3

Part of it is normal correction due to the run up over the past 1 - 2 years (expecting about 10%). but the subprime lending problems in the US have affected the markets world-wide. Still most are higher than they were even six months ago.

Market ups and downs are caused by a variety of things I don't fully understand either. What we would consider good news, is often considered bad news by investors so the markets go down despite the good news. However, the current ups and downs are largely due to bad news - the subprime lending market debacle.

I don't think there is any simple or complex explanation that will be thorough enough for anyone to understand it all. Half the time I think the experts don't even understand most of it.

Answer 4

It's a complex global economy we live in now. The stock markets are feeling a correction in the credit markets related to U.S. subprime and alt-a mortgage defaults of the 2006 vintage. Also, bank lending is tightening up for leveraged coprorate loans. People see that the overall housing correction may also be impacting consumer spending, the only thing that has kept us out of a recession for a while as corporate spending has been anemic.

The origins of the situation was that bank and other lending was very loose 2005-2006 especially since mortgages were being underwritten and packaged by Wall Street and big banks and sold as securities to investors.

These securities were very attractive because the yields for other fixed income investments were low. Investor money was chasing higher risk for marginally higher premiums. these investors were also foreign governments and investors from abroad who were chasing yield because there was alot of wealth being created in places like China, India and Japan, so they invested in US gov't obligations and other securities, which in turn fueled US liquidity.

In order to keep originating new mortgages to feed these securitizations, mortgage lenders kept creating looser and looser structures (hybrids, negative amortization, teaser adjustable rates, interest only) and lending to less creditworthy borrowers. For the borrowers, money was easy to come by as home values continued increasing everywhere, justifying sometimes outrageous loans.

So, home prices cooled. People were left having to hold their homes and pay their mortgages, but many couldn't afford them as asjustable rates were adjusting higher or, people just overstepped their limits. As defaults started rising from the mortgages originated in 2006, people started to realize that there was going to be a fallout.

Investors in those mortgage-backed securities were nervous and realizing that alot of those securities might be worth less than originally thought. Prices of the securities declined in the markets. Some funds went out of business.

Then, mortgage originators who were lending subprime were facing margin calls as fewer banks were lending to them to underwrite these loans, which were no longer popular to the investors. Some of these companies went bankrupt.

Now, they are feeling it in the stock markets too. So, some debt laden borrowers are losing their homes, some financial institutions have gone out of business and some investors are losing money and housing doesn't seem to be picking up again. Financial services firms are feeling the heat and anything with a subprime mortgage taint is also falling - insurance cos, banks, wall st firms, asset managers, specialty finance companies and esp the mortgage banks.

Many say that the fundamentals of many stocks are good, so this is a bit of an irrational response downward and things will level off, but only time will tell.

Answer 5

Our markets are reacting to the Lending markets, more specifically subprime and bad mortgages loans.

For those in for the long term it it little more than just another day, for those planning to sell right away they will be losing. You do not gain nor lose a dime on the markets until you sell your shares.

What do you think the news in not telling us?

Answer 6

PJ is correct ---good answer PJ

and...if it is your impression that the media treats us like idiots, it is because of what has happened in the real estate industry ...did you not listen to Bush's speech yesterday?
He made it very clear that the American People did not read their contracts and were not educated enough when going into these sub-prime loans....
OUR FAULT----not the media's.

read a few papers, get on line, watch some news, listen to some news Breifings by the Government....then you will not feel so left out by the media.

Again---good job PJ....

good luck :)

Answer 7

Well if you had made a whole lot of money during the last 4 years would you want to risk loosing it? When people take profits the market has to go down.