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March 05, 2007
The then-US Federal Reserve chairman Alan Greenspan said in congressional testimony regarding the panic selling of the 1987 US stock-market crash:
"Why were stocks going down? Because people were selling. Why were people selling? Because stocks were going down."
For those who make their living in markets, the logic is impeccable. However, there is the little question of why. What causes this turbulence in stockmarkets ? Why, for instance, was $US800 billion wiped from the US stockmarket last week? Could it be the Delphic Greenspan's 'irrational exuberance'? If not, could it be a little bit of pricing for risk?
The commentary in the western press --including that of the Australian Financial Review-- points the finger at China--athe 9% decline in the Shanghai market last Tuesday. The financial pundits just talk in terms of links not causes, and wrap it up in a lot of spin about the stockmarket wobbles providing opportunities to buy. London and New York are protecting their interest as centres of global finance. The more astute pundits say that the fall in Chinese markets was the trigger for US selling. Or was that a contagion rather than a trigger?
So what was the dynamic underlying the US market that was triggered by Shanghai Tuesday? How about fear? Fear about defaults in the US' sub-prime mortgage market from rising interest rates and falling house prices spreading. The fear that the meltdown of these mortgages will create a massive credit crunch in short order. And the US has an an auto recession and a manufacturing recession. Even Alan Greenspan is talking in terms of the possibilities of recession in the US and in the global economy.
How come the Australian market has wiped out the 2007 gains?Just caught up in the general contagion of pent-up fear in global share markets? Just following Wall Street? Markets feeding on themselves? The laws of gravity as the AFR usefully surmises?
Could global volatility have something to do with the way that the innovative private equity forms work: buy it, strip it, flip it? Or the hedge fund boom with its wild West type of regulation?
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Actually I'm fairly sure that the bulk of the global market has been less volatile over the past few years. But the bottom line is that markets ARE volatile. This is well explained - as I suspect you know, Gary - in Charles Kindleberger's book "Manias, Panics, and Crashes: A History of Financial Crises".
As for private equity, I believe Glenn Stevens has it pegged: most of the enthusiasm is the result of certain investment experts noticing that after years of financial caution and strong growth, a lot of companies look undergeared.