“My Two Cents”
By Andy Sutton

6/14/2006

Markets are a funny thing, especially when you're watching the havoc from the outside to some degree. World equity markets continue to be taken behind the woodshed for a beating the likes of which we haven't seen since the last time Mike Tyson stepped in a boxing ring. Oh, that was a biting, not a beating.. My mistake.

Money which rushed into equity, bond and commodities markets is now being sucked out of them as investors hit the exits. The question is why? There are a couple of possibilities here, any of which could be the real reason. Lets look at the backdrop for all of this for a minute. When you look at the individual factors involved in the markets, nothing really has changed. We'll probably get rate hike #17 at the end of the month. We knew that. Fed futures have been pricing in over an 80% probability of a hike for a few weeks now. So why have world equity markets been cleaned out to the tune of more than $2 trillion? The US housing market is undeniably at a crossroads. Ahead lies either a plateau, sporadic falling prices, or more likely a combination of the two. In either case, the liquidity pump has all but run dry. People with a ravenous appetite for consumer goods have drawn all the equity that can be drawn. A drop in prices will have disastrous results for many of them. But again, these things we've known. Perhaps this is a natural periodic correction before the 'summer rally' or perhaps there are other market forces at work driving money back into paper vis a vis bonds and money markets.

Recently, Ben Bernanke has been showing his face in public, mentioning the evil 'I' word. The average person has had this figured out for quite a while now though. You won't hear them come right out and say it because most people don't understand the concept, but to some extent, even the credit-hungry chumps get it. Things cost more. In those simple terms, even the most average person can relate. So why does the fact that Big Ben is out there paying lip service to inflation mean anything? If anything, you'd think that the fact that they're finally admitting it would be a good thing?

But that isn't how the markets work, is it? Markets today are speculative for the most part. Sure, there are some bastions of conservatism left in the world's financial markets, but by and large the markets are filled with people buying on the hopes that tomorrow brings someone with a bigger wallet. That is very dangerous when the "I" word starts bouncing around in Fed Chief speeches. It is the financial equivalent of walking into a crowded theater and yelling fire. Sure, most folks will make it to the exits, but there are always a few that get stomped along the way as well.

 

Andy Sutton holds an MBA in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics.

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