On the eve of Thanksgiving the financial turmoil afflicting US and europe seems to have hit Asia with market indices falling sharply – the shanghai index has fallen 15%, even though this has been a bubble waiting to burst. The yen carry trade too is unwinding fast with any money flooding into government bonds. Thus far Asia has avoided being tainted by sub prime but maybe the time has come for full disclosure from all the lenders involved and a proper audit of who has been left holding these toxic investments.
It is sometimes difficult to remember that the roots of this current mad, manic market go back to 2000 when we had the start of the housing boom. Housing then seemed a safe bet after the dot com crash and interest rates were also on a downward trend. In the UK “bricks and mortar” have always been seen as a safen haven and following the scandals in the pension industry the flight to property really took hold.
Meantime in the US low interest rates were fuelling a consumer boom and encouraging more and more people into property, regardless of their credit rating – after all property prices were only going one way, ie up . Some months ago a major bank (whose name i wont mention) admitted that their computer model for their mortgage backed investments hadnt even been programmed for property prices to fall!! Extraordinary.
I also know for a fact that 2 years ago major investment banks were not interested in prime mortgages – all mortgage sales advisors were being incentivised to sell to the sub prime sector because their mathematical models told them they couldn’t fail. Their stupidity and complacency is truly mind boggling. It’s also about time that the financial world stops peddling the myth that their products are somehow backed by mathematical models equivalent or better than those produced by MIT. They are not!! The market is run by humans who are driven by equal amounts of fear and greed. To my knowledge no mathematician has yet been able to come up with a formula for these twim emotions.
One of my favourite quotes from Warren Buffett is: “Success in investing doesn’t correlate with I.Q. ….. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”