Sunday, May 09, 2010

The 1000 points DOW plunge on Thursday...

This is the last posting on the recent financial market turmoil. I've been pouring through the news reports and various data over the weekend to get a feel of what is going on. There is a emergency rescue package put up by the EU to be announced later on Sunday. This thing will either work and calm the markets or it will intensify the turmoil if deemed insufficient....if it gets bad, it can get really bad very fast and the effects will be long lasting.

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. .

22 comments:

Divali said...

Hi Lucky

Economist Dean Baker's blog is my daily read:

http://www.cepr.net/index.php/blogs/beat-the-press/the-post-makes-stuff-up-in-the-news-section-to-push-its-deficit-reduction-agenda/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+beat_the_press+%28Beat+the+Press%29


For those who are too confused about this Greek crisis and are having difficulty understanding head-or-tail:

http://marketplace.publicradio.org/display/web/2010/05/07/whiteboard-counterparty-risk/


Global markets weekahead:

http://www.reuters.com/article/idUSTRE6464Y520100507

Hv a "restful" weekend..

Divali said...

Hi Lucky

Fresh from the NYT, 10 mins ago:

http://www.nytimes.com/2010/05/09/business/global/09ripple.html

Anonymous said...

The most important thing is that whatever the problems or crisis, the political system remains stable.

For instance, the US will continue their system of democracy. Obama will omplete his term or even win another term.

In Greece alhough there may be some riots but they will eventually get over with it. Just like what happened in Argentina in late 90s when their currency became junk. But today things are very normal.

In Singapore, even better. No matter what, political stability is as solid as a rock. And no one can manage to organise any protest that exceed 20 people.

So not to worry where peace and stability is concerned. Revolutions and world wars are a thing of the past.

Anonymous said...

Not all debts are bad. Lucky seems to have a problem understanding that.
The day you were born, you are indebted to your parents, the doctors and nurses. As you grow up, you are indebted to teachers, mentors even your country.And when you finally laid to rest, you may even be indebted to your ministers and spouse.
Good debts makes us want to repay these people with good deeds.
Good debts make us slaves to righteousness.
How much do you owe those who put a roof over your head in your sojourner here?
Priceless or a life time of service?

StatusQuoNotOK said...

Anon 9/5/10 08:10

As I was leaning back to savor ur reassuring logic, my eyes met the large world map I have on my side wall.

Then I started to laugh..
...and I am still laughing..

StatusQuoNotOK said...

Anon 9/5/10 09:46

U wrote:
"Lucky seems to have a problem understanding that."

Sorry, I have the same problem as Lucky. Could you kindly direct me to those misunderstood paragraphs and also drop some gray hair on it?

TokyoSingaporean said...

Hi LT,

I concur that there is a systemic problem with the PAP's model.

Also, you're right that we don't have the political means to bring about the necessary change to secure our future. Hence the need to be exceptionally alert and wary of the machinations and glad tidings that the government is preaching.

It is important that fellow Singaporeans plan hard for their future as we can't depend on PAP's directions to guide us. We need to guide our own future.

Anonymous said...

Dear Lucky

all the g7 nations have been infected by Goldman. Singapore too btw.

U can't beat them at their own game. The only way as dr M realized was to change the rules. Either short term capital controls or simply invite all the gs jpm bankers for coffee with no toilet breaks.

Anonymous said...

"...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."

"U can't beat them at their own game. The only way as dr M realized was to change the rules. Either short term capital controls or simply invite all the gs jpm bankers for coffee with no toilet breaks."

put these two together, what do you get?

Anonymous said...

the only thing i am uncertain or divided is, are we building a "new city" or the "old city" dressed up to look new?

hmmmm.....

if it is the latter, then, bye bye.

Anonymous said...

Whatever it is, understand the market or not, not all are market savy by the way, Singaporeans must not MAR their own live. One possible way(other ways maybe available which i don't know) is to get away from SIN....pun intended.

patriot

Anonymous said...

Whatever it is, understand the market or not, not all are market savy by the way, Singaporeans must not MAR their own live. One possible way(other ways maybe available which i don't know) is to get away from SIN....pun intended.

Have to say that me is a layman.

patriot

debter said...

I am not sure about in debt to pay a housing loan ( HDB ) over a period of 20- 30 yrs.

People are more savy and aware not to drag a loan over too long a period

Assuming a young couple both earning an income, buying a $400K HDB.
The loan may have started off with a term of 20 years or more. Over that period, their income would have increased and they would be able to pay off large amounts in lump sum. The loan would have been paid up within or much less the 20 year period. Assuming again they are both 30 years old, by the age of 50 or earlier they would have paid the entire loan.

The interest rates over the next 3-5years will remain below 5%.. this makes repayments affordable.
The story here is: as long as the couple have jobs and are getting higher salaries over the years, mortage is not an issu.

There is no doom and gloom..

Otherwise, we in this blog are assuming that 90% of people in the stock and property markets are idiots.. and that includes the banks.

Anonymous said...

1527

precisely. that's one possible scenario...for many.

Anonymous said...

"The story here is: as long as the couple have jobs and are getting higher salaries over the years, mortage is not an issu."

The ugly truth is that for most couples, they are not getting higher salaries over the years.

Starting pay has stagnated for most young adults in the $2k region. For some, it has sunk into the $1k zone.

In the meanwhile, cost of living goes up. The rent goes up regardless the economic conditions. Even the cost for world cup has jumped 7 times compared to 4 years ago.

It is a scary scenario, given that for most couples, they make enough money to live from paycheck to paycheck at best.

With Singapore's addiction to cheap, foreign labour for everything from clearing dishes to IT support, I wouldn't be surprised if wages for 2010 would continue to be depressed.

Anonymous said...

anon 9/5/10 16:03
You have no figures to prove, do you?

Those seeking financial help is still at a low figure. Wouldn't that suggest MOST are managing?

Not only managing, but visiting NATAS fair too.

Anonymous said...

No figures to prove?

Ask around and you get an idea of what uni grads are earning these days.

All around $2-$3K. These figures are still the same or even lower as compared to what my uncles were earning back then as degree holders.

You don't need figures to prove this, just ask around. Figures on newspapers are mostly fake anyway and I never believe those.

Anonymous said...

One formula I learnt from the ex-CEO of a local insurance company is that first-time home buyers should buy a property (HDB flat or private) that is not more than 5 times their annual family income and take not more than 25 years to repay the loan.

For example, if both couple work and earn $5000 monthly, it will be $60,000 a year. They should buy a property under 5 x $60,000 or $300,000.

Personally, I feel that a first-time buyers should always buy direct from HDB flats as that will be the best deal you can get not matter what. Of course, avoid those matured estates which are already over-priced.

Without knowing all the above, I did that 10 years ago and now I am glad that I am not being tied down by heavy housing debt like others even when I am out of job for a while.

xl said...

Hi lucky,
U mentioned 2 crisis & 3 recessions. I'm missing out on 3rd recession. Can englighten me?

2 crisis:
- subprime
- euro

3 recessions:
- dot com
- sars
- ???

hyipinvestor said...

Liberty Reserve Investing - Make Money Online - The Best High Yield Investment Programs
Make Liberty Reserve Money on HYIPs(High Yield Investments Program)
HYIP is an abbreviation of "High Yield Investment Program". The principle of working with HYIPs is very simple.
You sign up on the project’s website, open an account in an international Electronic Payment System (EPS) like Liberty Reserve, Perfect Money, and invest money in this project .
What is Liberty Resereve?You can find answer on
http://www.yahoomsngroup.com/libertyreserve.html
Although high yield investing sounds like a lucrative way to trade, it involves greater risk. Due to the growing number of investment frauds associated with high yield investment programs (HYIP), many investors should shy away from these ventures.The Best Low Risk - High Return Investment.
There are ways to find a legitimate high yield investments and avoid being victimized by HIYP scams.Do you want to become millionaire in one day
I Made Several Millions Profit with Liberty reserve and perfectmoney money in paying hyips
Today,Many people feel like they don't have enough money in their lives. These days having only one stream of income isn't enough. People are always looking for more. Life is getting expensive. People want to be able to go out and do what they want, take vacations, have fun, and in general enjoy life. The problem is that they usually don't have enough money or time to enjoy these things. This is where E-Currency Investment comes in.Becoming a HYIP Investment expert is not easy, but it can be very profitable, you can be able to gain daily interest as high as you will never find in any other investment opportunity!
Is it worth dealing with HYIPs?
Any business is a risk. There’s nothing guaranteed and certain in business inherently. As an example – economic crises, major banks and companies bankruptcies, permanent oil, gold, real estate price fluctuations.
From this point of view, a high-yield deposit differs from a low-yield one only in that in the first instance the investor knows that he’s running a risk and, therefore, secures himself to the utmost, and in the latter case the loss in income or of money is like a bolt from the blue.
Hence, investing in HYIPs is often the only way to earn serious money having a modest initial capital.
See more information at HYIP Investments on Hyips Monitor sites.
http://www.yahoomsngroup.com
http://www.makecurrencyonline.com
http://www.libertyreserveforex.net
http://www.payinghyiponline.com
If you've been having a hard time keeping up with your bills, you feel like you want more money, or you feel you need to grab a hold of your life, then I recommend checking out E-Currency Investment.
First,You need to have one liberty reserve account or perfectmoney account.
Second, you need fund your liberty reserve account. You can find the best exchange company on http://www.bsrates.com
Third, Choose a paying hyips from HYIPs Monitors sites and make your deposit with your Liberty Reserve Money. we recommed the two great monitors for Serious Investors
http://www.libertyreserveinvestmenthyip.com
http://www.hyipfunding.com
Last, Waiting for your payment. Most of hyips send payment automatic and directly into your liberty reserve account. Reinvest Again , You will become Millionaire.

Find More Serious Paying HYIPs,Just check my site
http://www.betyun.biz/

My email: brownfew@gmail.com .If you have any questions,you can mail to me.
The Liberty Reserve MLM Game
http://www.libertyreserve-game.com

Finance Dissertation Help said...

Whenever i see the post like your's i feel that there are still helpful people who share information for the help of others, it must be helpful for other's. thanx and good job.

Finance Dissertation Proposal

hyip said...

Is this is true? PIMCO is the biggest bond fund in the world and Bill Gross, the co-founder and El Erian is considered to be the best in the business.