i am beginning to believe that like the fed is a lender of last resort, equity markets also require a buyer of last resort when systemic risk exists from equity market collapses. in earlier days, there used to be some stabilization from low correlation with foreign economies, but now its like a resonance effect - like that famous bridge that collapsed when synchronized swinging due to wind forces brought it into resonance. private funds of any sort - pension, mutual, hedge have proven themselves to be just as panicky as the average investor. especially 10x leveraged hedgies (who really should be prosecuted, and made an example out of if they did anything illegal). you need a stabilizing force - whether its the fed itself, or another large government fund of some sort, i don’t know, but something is needed for sure. we’ve basically seen 3-4 equity market collapses cause recessions in the last 2 decades. i lived through the asian crisis in asia, the tech bubble burst in the bay area, and now this one in NY, and have seen first hand the devastating effects on ordinary people who are just following a typical CFA’s advice to keep equity allocations. i don’t blame them if they turn away from equity for a whole generation now. losing 50% of your life savings is no joke for a simple salaried person.
India wanted to create a reserve sometime back which would do such a thing. But, it never took off due to obvious issues as who decides when it’s a good time to buy, etc.
Geez…The equity buyer of last resort is Virgin.
Somehow people don’t care if valuations go up (nobody questions if this is ‘real’ and if there should be intervention) but if stuff goes down (and we’re at the levels of 2002 now, not even back to the 1980s) they act like they’ve ‘lost’ something. You enjoyed the upside, now don’t complain when there’s a downside. Question why there was a bull market in the first place, not why the bear market exists as that part is the easiest to explain.
rohufish Wrote: ------------------------------------------------------- > we’ve basically seen 3-4 equity market collapses > cause recessions in the last 2 decades. i lived > through the asian crisis in asia, the tech bubble > burst in the bay area, and now this one in NY, Jeez - Where are you moving next?
tobias Wrote: ------------------------------------------------------- > rohufish Wrote: > -------------------------------------------------- > ----- > > > we’ve basically seen 3-4 equity market > collapses > > cause recessions in the last 2 decades. i lived > > through the asian crisis in asia, the tech > bubble > > burst in the bay area, and now this one in NY, > > > Jeez - Where are you moving next? Seriously. You’re like a financial grim reaper.
Maybe he’s going to Dubai.
The government is buying corporate debt. That’s pretty close to equity buyer of last resort. A company can issue debt to the government and buy stock back.
I just read this warren buffett quote. He said he was buying U.S. stocks (when they were 7% higher) “I don’t think people can time it, so I believe in doing it promptly. And as I mentioned last week, I actually, in my personal portfolio, was going from 100 percent governments into 100 percent stocks, as stocks are going down.”
Buffet is just looking out for himself and talk the mkt up. Didn’t he sell a crap load of way OTM put options years ago? Does anyone know if that position is still open and whehter Buffet is still shorting the USD? “BNP Paribas SA, the most-accurate forecaster in a 2007 Bloomberg survey, says the dollar may return to parity with the euro in coming months.” Buffet ain’t doing to good these days…
I didn’t know about the out of the money puts. His legacy & reputation would be shattered if that comes out as true about the puts. He’s not shorting the U.S. dollar any longer. That trade ended a while ago.
http://www.portfolio.com/views/blogs/market-movers/2007/11/05/warren-buffett-derivatives-speculator http://online.wsj.com/article/SB119422251636481981.html To collect $2.5 bn collected in OTM options premium would have HUGE exposure! Does anyone have more info on the strikes and underlying indeces/equities? It explains why Buffett hits the airwaves so frequently these days. He’s got to talk himself out of hole he’s dug for himself.
the point is - these disorderly equity markets have real economy effects that have social stability, political implications too. look at all the regulation we’re going to get now - probably too much once the dust settles. i should clarify - this would be a buyer / seller of last resort - they would sell frothy markets and buy panicked ones. look at how much in taxes we will pay to clean up this mess now. if there was a federal ‘market maker’, who made their spread and sent it to the treasury + buying at distressed prices, selling at excessive ones, i’d bet the taxpayer would actually have not ended up holding the bag like now. think about it for a second, as crazy as it may sound at first. i think the future doesn’t change in a week - we make the future as we go along. if the herd turns mad, they destroy the future. thats whats happening now. we have collectively panicked and turned the global sync recession into a self fulfilling prophecy. my point is, we should take proactive, counter cyclical steps to avoid jumping off the cliff in a mass suicide every 5-7 years.
Not sure about an equity buyer of last resort - though Joey’s comment about Virgin was funny. The whole point of equity is that you get residual profits and some control over management with the substantial risk (compared to debt) that you can lose 100% of your investment. I’m not sure how the idea of the government or an institution being guaranteed to step in and buy equities does anything other than create an embedded put option that makes stock pricing more tricky than it is now. A government may decide it is in the public interest not to have certain industries completely wiped out because the industry provides essential services and/or employment, and would be too difficult to resurrect after a collapse. In that case it might buy up the equity of specific companies to keep them solvent. But to just buy equities in general seems like something that sets up perverse incentives that can be easily abused.
When talking about “stocks in general” I don’t think it’s fair to just say residual profits (I would say that about an individual stock for sure). The reason I make this distinction is because our society is stitched together by publicly traded companies. If UPS fails, Fedex will take their piece of the pie (maybe that’s not the best example, but i’m trying to highlight the difference between the risks of “stocks in general” and specific stock investing). Anyway, I agree with Joey’s comments that you either own stocks or guns. One of the two will pay off eventually.
CareerChange Wrote: ------------------------------------------------------- > India wanted to create a reserve sometime back > which would do such a thing. But, it never took > off due to obvious issues as who decides when it’s > a good time to buy, etc. if you look at the reserve bank of india, they’ve actually taken a pretty proactive approach to popping bubbles wherever possible. when real estate was hot, they increased the risk weights on capital provisions for real estate loans by banks. they take a sector by sector risk weighting approach, which i like a lot. i just have a fundamental issue with letting the 10x leveraged 25 year old idiot of a hedgie bet other people’s money on crazy risks, bringing down a perfectly ok emerging market economy. it happened in 1997-98, again in 2002, now again in 2008. economic theory developed so far is incomplete. these issues need to be addressed, or frankly, free trade and free markets will not last, and we’ll see return of despicable socialism, which is the last thing i ever want to see. market breakdowns must be tackled by us, so we carry the whole world with us. the poor bus driver, who lost 50% of his life savings and sold at the bottom because he couldn’t take any more risk when it was best to take risk, doesn’t care about economic theory, he will picket and riot and change government unless we carry him with us.
lender of last resort -perhaps -Cant be the govt or its arma like the Fed -they provided the incentives to the hedgies to leverage up like crazy,in the first place.the fox cant be allowed to guard the henhouse