I’ll huff and I’ll puff till I blow your house down

The fairy tale about the three little pigs is about the danger of not taking enough care about building ones home on a solid foundation. One is in danger of being attacked by a bad wolf, the quintessential image of the nasty. I thought of this fairy tale when looking at the recent drama unfolding across the world’s financial institutions and bourses.

The stock exchanges across the world seem to have calmed down now and the hysteria has abated somewhat. It seems strange that the share investors, whether individual or institutional, have bought into the hype that the reduction by the USA central bank of its Discount Rate and an offer to lend directly to struggling financial institutions, would resolve the current problems.

This confirms again, in my mind, that the entire shares and stock exchange scenario is actually one big illusion. Share prices are hyped up and brought down by manipulation, arbitrary events, rumours and emotions. With other words, a house made of straw.

The fall of the world stock prices immediately after 9/11 had absolutely nothing to do with the values of the stocks involved. It was a perception that the world was now heading towards Armageddon, well some people definitely thought that, that caused a panic sell off. It had nothing even remotely to do with the health of any economy, or the financial well-being of the companies themselves.

What has induced the sell off this time around has been triggered by several factors. The first factor, for me and I’m no economist so many people will disagree, is that the stock markets across the world are totally overheated. That means that share prices are nowhere near a representation of the value of the company, fund, certificate, cash bond or whatever the paper.

For instance if one were to place an actual value against Google, according to accounting conventions, one would find that the market has a far higher view of Google’s value than the financial statements would indicate. It’s cool to be invested in Tech Stocks again. So Google benefits. Facebook seems to be heading for a listing. It’s probably still a good time.

The second factor is that, again, investors have been greedy. This happens so often. But only the really sad stories make the headlines. These are usually about funds that fall apart, leaving widows and orphans without any money. Some bad person, con man, has sold them a scheme that went belly-up after a few months or even lasted a few years.

What always distinguishes these schemes from the more secure investments, is that they pay out extraordinary high interest. Always. A bank would pay out interest at say 6%, in the same economic environment these ‘investment funds’ would pay out 18% as an example. Somewhere there should be a warning light going off in the mind of the investor, that this could be a high risk investment.

The same principle applies with the stock exchange. During the last two years, or possibly even longer, the stock exchanges whether in Johannesburg, London or New York have been rising at a rate higher than realistically could be considered to represent the value of the shares or the economies they represent. At some stage this has to correct.

Because of the rapidity of the rise, the share prices will correct fairly rapidly as well. Everybody will complain that it is a crash. Some people will throw themselves out of windows because in their greed they invested everything in one investment vehicle. And the general chaos, as per previous crashes, will repeat itself. It will take a while to calm down, and then the rat race will start all over again.

This time around, the banks have been the cause of the shivers that went around the exchanges, world wide. The banks have thought of an ingenious way of lending money to the small man for property purchases, no care about the credit worthiness of the individual, repackaging these loans into bundles and selling these off at high interest rates to the rest of the world. It seems the Germans and French were the greediest purchasers.

Nobody, in the banking environment cares about the little guy who now has the responsibility of a debt for the rest of his life. The property market in the States has adjusted itself, probably to a more realistic level. The owner, who should never have been allowed a loan to purchase his house, sits with a mortgage bond which costs more, because the interest rate has been increased, and a house that has lost value because the market has adjusted itself down.

It’s a new way of fleecing the man in the street on the one hand, and other financial institutions on the other. Now that the whole sad story has surfaced, legislation will be put in place to protect the innocent against this kind of evil. It’s close to fraud. It reminds me of the days when people sold shares in gold mines that didn’t exist. It will be interesting to see what the world will come up next to play on the greed in all of us. Buyer beware. Indeed.