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Friday, March 29, 2024

The Fearful Rise of Markets

Book extract: The Fearful Rise of Markets

By John Authers, Financial Times 

Excerpt from: The Fearful Rise of Markets: Global Bubbles, Synchronized Meltdowns, and How To Prevent Them in the Future

Had it not been so sinister, it might have been funny. As the day wore on and turned into the next, we in the newsroom watched the two charts snaking across the screen. Every time the S&P rose, the dollar rose against the yen, and vice versa. What on earth was going on? 

Correlations like this are unnatural. In the years leading up to the Shanghai Surprise, the yen and the S&P had moved completely independently. They are two of the most liquid markets on earth, traded historically by completely different people, and there are many unconnected reasons why people would exchange in and out of the yen (for trade or tourism), or buy or sell a US stock (thanks to the latest news from corporate America). But since the Shanghai Surprise, statisticians have shown that any move in the S&P is sufficient to explain 40 per cent of moves in the yen, and vice versa. Does this matter? Perhaps more than you might think. These two measures should have nothing in common, which implies that neither market was being priced efficiently. Instead, these entangled markets were driven by the same investors, using the same flood of speculative money.

The Shanghai Surprise, we now know, marked the start of the worst global financial crisis for at least 80 years, and plunged the global economy into freefall in 2009 – the most truly global economic crash on record. Inefficiently priced markets drove this dreadful process. If currencies are buoyed or depressed by speculation, they skew the terms of global trade. Governments’ control over their own economies is compromised if exchange rates render their goods too cheap or too expensive. An excessive oil price can drive the world into recession. Extreme food prices mean starvation for millions. Money pouring into emerging markets stokes inflation and destabilises the economies on which the world now relies for its growth. If credit becomes too cheap and then too expensive for borrowers, then an unsustainable boom is followed by a bust.

And for investors, risk management becomes impossible when all markets move in unison. With nowhere to hide, everyone’s pension plan takes a hit if markets crash together. In one week of October 2008, the value of global retirement assets took a hit of about 20 per cent.

Full article here.>

 

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