Friday, Jul 27, 2007
worlds beginning to collide
Firstrung: The credit crunch starts to bite
John Stepek - Moneyweek. Up until last week, global stock markets had been ignoring the carnage in the credit markets. Not anymore. Yesterday the FTSE 100 had its biggest single day points fall in five years. It dived more than 200 points - wiping out all the progress made since March. The FTSE 250 had the worst points fall in its history, slumping 382. And in the US, the Dow Jones Industrial Average lost more than 300 points - plunging by up to 440 points during the session.
Posted by converted lurker @ 12:19 PM (208 views) Add Comment
2 Comments
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1. converted lurker said...
BTW guys, just thought I'd add, Firstrung has the full permission and co-operation of John at Moneyweek in relation to publishing his articles. Back on topic, anyone else getting the feeling that the inflated cash has nowhere left to hide and that we could witness markets everywhere, on just abut everything, in tatters? The cantagion will not even help contrarian investors - unless you dig up your own gold dimoands/other precious metals and then hide them in another hole
2. confused76 said...
Uh uh, Jonh said...
"The problem with buying on the 'greater fool' theory, and being too scared to be out of a market because it might keep going up - as has been happening in recent years - is that you end up borrowing money to buy overpriced assets. For example, recent entrants into the buy-to-let market say they don't mind subsidising their tenant's rental payments, because they're "in it for the long-term." They don't mind potential 'short-term' capital falls, because they're "in it for the long-term."
But buy and hold is a very flawed strategy if the asset you're holding isn't actually worth the price you paid for it. And it's worse still if you are holding it using borrowed money. The 'greater fool' theory of buying and selling depends on you finding another, more eager person to sell to for a higher price as quickly as you can.
If you just sit on an overvalued asset, it's only a matter of time before the market realises that it's actually not worth what you paid for it, and marks it down accordingly. Then all you're left with is a huge debt to service, usually at a time when suddenly your job looks less secure, debt servicing costs are rising and creditors are much less sympathetic than when they loaned you the money in the first place."