Wednesday, October 15, 2008

Spilled Milk

Stock markets across the world went through another round of roller-coaster ride. DJIA went up 900 points in a single day, the largest ever single day gain since 1930s. But that is after DJIA dropped to ~7000 points for the 1st time since many many years....

The DJIA and the rest of the world gained because people are optimistic about the concerted efforts by governments across the world to save the financial industry. Being a skeptic, I am not very sure how effective those concerted efforts will be, and what kind of seed it will sow.

The current problem lies in the fact that people are spending beyond their means. The toxic securities lying in the bank balance sheets are said to worth a lot a lot more than what the markets say they are worth.

It is like you think you own an asset that is worth 1 million dollars, and you happily spend half a million. Now you realised your asset is only worth half of what you thought, which is only 0.5 million dollars, but you have already spent that half a million. You are penniless!

The injection of credits into the ailing financial system only penalise people who are prudent in managing their own money. Why? Because the injection of credits means you need more money to buy the same stuff. Effectively, you lose money!

In my personal opinion, once the current finanical crisis settles down, we will go back to high inflation, commodities and precious metal will again become hot. Mark my words, it may take another 5-10 years to see that happening, but it will happen. The trillions of dollars won't just lie quietly in some corner of a bank vault.

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