Friday, July 11, 2014

Risky Assets: Captain of the Titanic


I am not calling for a crash or a correction but the wording Vice Chairman of the Fed Stan Fischer used is a stock market going down is not necessarily a worry. Not a worry? Sounds like something the Captain of the Titanic would say.

Today after watching CNBC and listening to Stan Fischer he commented about a term "mopping up" coined by former Fed Chairman Alan Greenspan after 2001 when stocks went down and dealing with the aftermath.  Fischer said, "At present we don't face a very serious macro--any serious asset price problems. I think there is a general concern about how strongly the equity markets are but, I don't think when you're dealing with equity, the stock market can go down without producing a financial crisis."  He goes on to say an equity price bubble is easier to deal with.

Steve Liesman a CNBC made a good point that Fischer or the Fed's idea of an equity bubble and our idea of an equity bubble are a little different.

This reminds me of Jeremy Siegel's book "Stocks for the Long Run Fifth edition" in chapter 2 The Great Financial Crisis of 2008 there is a sub-heading Over leverage by Financial Institutions in Risky Assets. The main point is the fall in real estate prices or the related mortgage-backed securities by itself would have caused the financial crisis or a severe recession if not for key financial firms having built up these assets on their balance sheets. The total value of subprime, alt-A and jumbo mortgages reached $2.8 trillion in the second qtr of 2007. Stated in his book Siegel says even if the price of all these securities went to zero, the value of technology stocks obtained a larger decline during the crash of the dot-com boom seven years earlier.

So the big difference is the brokerage houses and investment banks did not hold the speculative stocks in 2001 time period and they did hold the risky assets in 2008 because they weren't rated to be risky.

If you invest in the stock market also called the equity market always be cognizant that you are buying parts of businesses and there is no guarantee of success. If you make a wrong decision buying a company for to high a price the market is unkind. I think I heard it from Warren Buffett that every investor over long periods will experience a 50% drop in value of his portfolio from peak-to-trough. Of course like Buffett keeping cash on hand to take advantage is a way to combat any decline along with buying protection with options or other hedging alternatives. Most of us investing since 2008 or 2001 or longer have experienced severe market corrections and crashes. The goal is to take advantage of them... Captain your own Ship and always be a little worried!

Thanks for reading

DSF

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