One of the interest things that happened during the market turmoil last week was this 1000pts plunge in the DOW followed by a recovery on Thursday. I was looking through various explanations including software bug, fat fingers pressing the wrong key, fast computer trading etc. There is an SEC investigation that will get to the bottom of it. But what started it?...The market was relatively stable for a few hours of trading after the open.
One of things I found out happened before the big plunge was a CNBC interview of highly respected PIMCO CEO El Erian[Wiki page]. PIMCO is the biggest bond fund in the world and Bill Gross,the co-founder and El Erian are considered to be the best in the business. PIMCO has successfully has navigated every crisis very well for its investors - many attribute this to its strong team making very accurate assessment of the macro economic picture. Here is the El Erian interview:
El Erian gave a very thorough and clear explanation of whole European situation. Linking the risk to the banks, explaining how credit can freeze up like in the subprime crisis and one really gets and appreciation of how severe the situation is. You notice at the start of the interview the DOW was down a mere 78pts. By the time he finished talking, the DOW was down triple digits -115pts. Shortly after that the DOW declined in an accelerated fashion followed by the 1000pts plunged.
I'm not saying El Erian caused the plunge. The actual drop probably has something to do with computers overruning the system with sell orders when there are insufficient buy orders. Maybe it is just coincidence he spoke just before the market rolled over. What is important is his message. The global financial system with its high level of debt is very fragile and this economic recovery faces many headwinds. While this 1000 points drop was likely caused by computers and high speed trading, the next time it happens the causes may be economic and the problems here to stay.
While things look sunny with the govt finally willing to up the CPF contribution by employers a few weeks ago, in today's fragile global economy the outlook can change in a matter of days. Why? In the alchemy of finance, they have created the illusion of wealth from debt ...you're living in a HDB flat worth $600K only because someone else is willing to borrow that amount from the bank to buy it from you. ..your wealth is determined by somebody else's willingness to go into debt. It is completely unwise to have our ability to retire linked to HDB flats which the govt now tells us are 'investments'. By tying our funds meant for retirement in HDB flats, when something goes wrong, we not only see our wealth diminish but our ability to retirement disappear at the same time. While we may not have the political means today to bring about changes that will secure our future, we have to be wary of the system we live in and think hard about our future. Minister Mah comes out to say that flats are affordable by whatever metric he uses to measure it...at the end of the day it requires a person to service a debt over 2-3 decades and it is this long exposure to a high level of debt that poses the risk. We have seen 2 crisis in 3 years and 3 recession in the last 10 years. In the previous decades when people had 'lifetime employment' it required only 7-10 years to pay for their homes. The feeling of insecurity among Singaporeans is not something imagined. .