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The Global Sell-Off Started |
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Written by Vladimir Popov
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Tuesday, 14 October 2008 |
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People began to fear that a worldwide depression is on its way after seeing every single index going at a few-year-low. This fear caused the stock prices to plummet in all markets and as a result several trillions of equity was erased from the global accounting books. All this became reality even after the assurance of the world governments that they will provide funds to back up the financial institutions. As most of us know, people are stupid, but up to a point. We exhibit a herd behavior, but there always is this moment when somebody realizes something is wrong. Well, the moment for investors to realize that there is something wrong with the stock market came a while ago, which is a good thing because they finally saw that this creation of the business mind is inherently faulty. Investors have realized that companies on the exchange overstate their profits to make themselves look better and increase the price of their stocks. However, when the moment of truth comes and the companies have to write off some nonexistent assets, the share price falls and investors lose money. I can suggest to them now to find some videos and books by Milton Friedman and to study them carefully before considering ever going back to the stock exchange. Even though I have not had the chance to share my knowledge of Friedman’s opinion of the banking sector with investors, they seem to have become aware of this economist’s teachings because soon after the beginning of the financial crisis investors have lost their willingness to trade with stocks and are beginning to trade with bonds. Bonds are much more secure investment and even though people know that the return on bonds is with times lower than the return on stocks, they no longer prefer risk to security. Unfortunately, this substitution from stocks to bonds will lead to slowdown in economic activity because it shifts the money away from investors with productive use of resources to government that can only worsen the situation instead of improving it. For more information on the topic please consider:
http://www.ft.com/cms/s/0/c9a27b24-93d1-11dd-b277-0000779fd18c,dwp_uuid=11f94e6e-7e94-11dd-b1af-000077b07658.html
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