The NYSE supposedly drops because of "worries" about sub-prime mortgages. Well, the "worry" is that the problems in that industry will lead to a general credit squeeze thus dampening economic activity and thus impacting profits, and thus impacting the stock markets.
By dropping now, in other words, the market is expressing concern about a future speculation that may occur, if a credit squeeze happens. Now, the market is nearly always priced on a basis of speculation about the future (that's what investing is), but this a clear case of speculation about speculation that might occur in the future, *if* something else happens in the credit markets (also, plainly, driven by speculation, since after all that's what an interest rate is).
The only thing increased sub-prime mortgage defaults have impacted so far, aside from from individual home owners, is the stock market. Nearly all other financial indicators are solid and looking good.
Yesterday, American Home Mortgage filed for chapter 11 protection and the S&P 500 went up 2.4%. Stocks regained pretty much all the ground lost the prior Friday, the worst single day loss in years.
We live in an era of a very different style of Fed management, from the '70s and '80s. The market is also much larger, and much more connected overseas, than it's ever been.
If extremely volitility is a bad thing (if). Traders are just going to have get over themselves.
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