Monday, September 15, 2008

Will the stalactites hold?

The financial meltdown has been making a mess on stock exchange floors and business boardrooms globally but nothing that has been tried so far seems to be freezing the tide of red ink.

Since the financial crises that kicked off in August 2007 it has beset markets and financial institutions all over the world, stock markets have lurched upwards, downwards and sideways since and seemingly at the whim of the market regulators in the United States.

The next collapse of a Bear Stearns, Northern Rock, Lehman Brothers or another New Zealand finance company seems just around the corner-if Bear Sterns Fannie and Freddie and Lehman Brothers have gone the way of the dodo, you can bet other Wall Street firms who have been drinking at the easy credit trough and lending to others whose assets are of dubious value are going to head the same way.

Last week a massive bombshell, one that has been on the brink for the best part of seven years, Fannie Mae and Freddie Mac finally collapse and the US Federal Government will pile 100s of billions of taxpayer dollars into it hoping to stem the flow.

All this has had a chilling effect on the credit market, the lifeblood of business, between financial institutions and other business and between individuals.

Heads of powerful investment banks have still not come clean about their exposure to the sub-prime derivatives market to in what Warren Buffett has called "financial weapons of mass destruction" and we continue to see new revelations everyday about previous cavalier attitudes to lending, and borrowing, coming home to roost.

The value of these derivatives in the Fannie and Freddie collapse are relevant to the bleak outlook for world markets and the global economy and likewise the recent Lehman Brothers meltdown.

Optimism is well overrated in this market because the bubble of optimism keeps getting pricked.

Even Warren Buffett's assurances that the Federal Reserve did the right thing bailing out Fannie and Freddie had me worried.

It seems a tad self serving to me on his part considering he usually keeps his mouth shut and claims not to like the limelight-seems to me he has been popping up everywhere in extended interviews, ball games, TV shows and the like over the last year or so, most uncharacteristic of him and his style in the past.

My feeling is that investors are set for at least another year of this cloak and dagger stuff.

The market has so far been propped up by taxpayers around the globe-directly to help ailing banks and indirectly to allow cheaper credit to flow through financial markets and ease the pressure on doing normal business.

There is no sign yet that this approach has or will work in the future, having said that, the vast increases in new and different financial instruments in the 1990s and early 2000s and the resultant surge in speculation and bull runs in sharemarkets took time to reach their nadir.

Perhaps now that the bubble has burst it will take just as long to recover from the hangover than the credit binge party itself.

Related Share Investor Reading

Don't dare use the"D" word
The global economy looks bad now? But wait there's more
Market Meltdown: I can smell the fear from here
Leaders must come clean over losses to restore trust
Global Credit Squeeze: There is no free lunch
Global Market Meltdown: What is Warren Buffett doing?
Credit crunch a blessing is disguise

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c Share Investor 2008

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