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Talking up a crash

Talking up a crash Moorad Choudhry

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There is a serious side to this week’s article and a slightly flippant one. Let's take the flippant one first. Is it possible for the business media to turn ordinary market volatility into a negative correction or even a crash?

Take a look at the headlines of the last few weeks. We note ever so slight signs of the impending beginning of wind-down of US Fed quantitative easing and some overseas markets start to experience capital flight and falling stock markets. Is this the start of another Far Eastern crash à la 1997? A fall in the renminbi is a signal of impending major policy change. A rise in house prices is a sign of another bubble brewing.

But asset prices don’t sit still, and one wouldn’t expect them to. Do we always have to jump to an instant explanation? Can’t asset prices, just for once, be allowed to be asset prices?

My old boss at Hoare Govett Securities back in the 1990s, the legendary Sean Baguley, had a great answer whenever a salesperson asked him why the price of the gilt future or the short-sterling future was falling.

“What’s happened to the gilt?!” the salesperson would shout across the floor.

“More sellers than buyers!” came back Mr Baguley’s reply.

There is rarely an instant explanation and perhaps everyone, starting with the business media, should accept that.

And now to the serious side. Investing is, for almost everyone, a long-term business. Day-traders aren’t investors. The business of finance – investing capital in companies thus enabling them to generate value and hence economic prosperity – takes time. And yet we have huge resources expended by just about every listed company in the world simply getting out their quarterly investor statements. Quarterly!

Volatility is natural in asset price behavior. It is possible for perfectly good companies with sound business models to suffer blips in performance. And yet the effort and “analysis” that is put in every quarter suggests that people don’t actually believe this. Short-term performance is everything, it would seem.

We should let markets be markets but not only accept volatility as natural - we should also let companies get on with their business and take the longer term view. Sometimes there are just more sellers than buyers. It isn’t the end of the world. Or indeed the end of the recovery.

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Tags: asset , asset price , bubble , Federal Reserve , futures , Hoare Govett Securities , investments , investors , market volatility , quantitative easing , Renminbi , Sean Baguley , sterling , traders
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