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Parallels Between 1929 And Today... Galbraith 101, Cfds, With A Little Marx Thrown In...

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During 1929 while acting on Broadway's 'Animal Crackers', Marx, who had built up a personal fortune of about $250,000, got caught up in the American passion for investing in the stock market. The development of railways, the automobile and mass electrification had convinced many Americans that the market could only go in one direction.

Everybody was giving stock tips at the time and Marx listened, then borrowed money to buy shares.

That was before Black Thursday, which was followed by Black Tuesday, as Wall Street lost all of the gains which had built up over the previous thirty years.

It was 1954, almost thirty years later, before the Dow Jones Industrial Average recovered to pre-1929 levels. Marx lost his entire fortune. He took it so badly that he went into a severe depression and a stand-in had to take his place on 'Animal Crackers'.

The only thing Marx gained from the experience was a joke, albeit a classic: "I made a killing on Wall Street the other day ... I shot my broker".

There are obvious parallels between the Great Crash which many believe prompted the Great Depression, and the current turmoil afflicting the markets, particularly for Irish investors.

Causes

In his seminal 1954 book, 'The Great Crash', John Galbraith argued that there were five underlying causes, including an imbalance in income distribution, and America's trade imbalance.

The other causes he identified were new complicated corporate investment entities, poor banking and "the poor state of economic intelligence".

New complicated structures have globalised exposure to the American sub-prime market causing a lack of trust among banks and bringing the trade in inter-bank loans to a halt.

Many people also blame the crash on margin trading where people such as Marx borrow to buy stocks. That the Iseq has had falls which are greater than its peer indices is due to a similar phenomenon today -- the Irish investors' love affair with CFDs (Contracts for Difference).

These are complicated financial instruments which allow you to leverage exposure to stock without technically owning the underlying share. Some estimates suggest that up to 50pc of trades in the Irish market can be attributable to CFDs.

As much as 3pc of Ryanair stocks are held on behalf of CFD holders. As the markets have gone into freefall CFD holders have been faced with margin calls.

A 10pc fall in the share price of a particular stock could be enough to wipe out a CFD holder's entire investment.

There are unsubstantiated rumours that one Irish investor had exposure to 100m of CRH stock through CFDs, which might explain the unusual volatility of that stock.

Many serious investors eschew the use of CFDs. While they can be a useful instrument for the sophisticated investor, most shareholders in Ireland and elsewhere do not fall into that category.

Exposure

Perhaps it is our experience with property which has prompted our exposure to CFDs. People, already used to leveraging up to buy property may find it easy to accept the risk of leveraging up to buy shares. The difference is that if you put €500,000 into a €3m property investment and the value of the investment falls by 10pc you do not have your bank ringing you up on holidays saying you have to inject another €500,000 or lose the property.

Thirty years for the SM to recover - you really do have to be in it for the long term.

TD

Edited by The Dragon

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Thirty years for the SM to recover - you really do have to be in it for the long term.

TD

I read the Galbraith book a few years ago and his other classic : A BRIEF HISTORY OF FINANCIAL EUPHORIA where he states that all financial instruments are just repackaged debt leveraged against more limited assets like property.

re CFDs . Its like buying property I assume. You buy a house with a 10 per cent deposit and if it goes up in value you have made a profit and can sell. However if it goes down by 10 per cent you have effectively lost your deposit .

The difference being with a CFD is that you will also lose the investment as soon as your deposit or margin is wiped out.

And its buying property as an investment rather than as somewhere to live thats at the root of the whole mess.

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I read the Galbraith book a few years ago and his other classic : A BRIEF HISTORY OF FINANCIAL EUPHORIA where he states that all financial instruments are just repackaged debt leveraged against more limited assets like property.

re CFDs . Its like buying property I assume. You buy a house with a 10 per cent deposit and if it goes up in value you have made a profit and can sell. However if it goes down by 10 per cent you have effectively lost your deposit .

The difference being with a CFD is that you will also lose the investment as soon as your deposit or margin is wiped out.

And its buying property as an investment rather than as somewhere to live thats at the root of the whole mess.

....you would think the 'great minds' in the City would have read people like Galbraith to reign in the risks.....but alas....they are/were all short term number crunchers using maths instead of the History of Economics....are the Risk Managers in the Lending Institutions of the Financial Sector having a rethink now ...?..did they see it coming but overruled by management teams who decided ...but everyone else is doing it......?....... :o:o:o

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....you would think the 'great minds' in the City would have read people like Galbraith to reign in the risks.....but alas....they are/were all short term number crunchers using maths instead of the History of Economics....are the Risk Managers in the Lending Institutions of the Financial Sector having a rethink now ...?..did they see it coming but overruled by management teams who decided ...but everyone else is doing it......?....... :o:o:o

That may be partly true but my experience is that most senior people in the City have quite a keen interest in and good knowledge of financial history. However, the system has evolved to make that irrelevant to most of them: once paid, an annual bonus is only ever partly reclaimed should the profits evaporate later. This sets the time horizon for most City types to be 3-5 years at most - i.e. the time it takes them to get into a position where they can earn a big pile of cash for one or two years. The City is littered with portfolios of toxic waste of all sorts of varieties built up by multi-million bonused sharks long retired to their yachts and then left to gradually re-absorb all the past 'profits' whilst their owners' spend the next 5 years trying to wind them down and limit the damage.

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That may be partly true but my experience is that most senior people in the City have quite a keen interest in and good knowledge of financial history. However, the system has evolved to make that irrelevant to most of them: once paid, an annual bonus is only ever partly reclaimed should the profits evaporate later. This sets the time horizon for most City types to be 3-5 years at most - i.e. the time it takes them to get into a position where they can earn a big pile of cash for one or two years. The City is littered with portfolios of toxic waste of all sorts of varieties built up by multi-million bonused sharks long retired to their yachts and then left to gradually re-absorb all the past 'profits' whilst their owners' spend the next 5 years trying to wind them down and limit the damage.

...good point ....and strengthens the argument for a full reclaim on bonuses for say a three year time gap.....this would make them more responsible as well as accountable in 'real' terms....... <_<<_<<_<

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