Not a good weekend to look at our 401Ks or IRAs. The Stock
Market went down about 10% in a week.
Depending how it was invested so did our savings.
Company earnings have not dropped. Other country stock
markets have not fallen much. The Economy is still doing well. Jobs and Wages
are growing. What is causing the sudden change?
It is leverage,
options and derivatives. These are higher risk borrowing and insurance
without reserves. For instance if you knew absolutely a stock would go up 300%
next week you would buy it now as an investor. If you don’t have enough money,
you could borrow to buy more shares. That is leverage. The downside if share
prices fell, you would still have to pay off what you borrowed and quickly. You
sell whatever has value to cover your debts. You could lose 100%.
Most people don’t know they are buying derivatives. Most of us have been buying index Exchange
Traded Funds (ETFs) or Exchange Traded Notes (ETNs). But now there are more leveraged ETFs & ETNs then there
are stocks. Few non-professional investors understand what they own and the
risks involved.
Warren Buffet has called derivatives “weapons of financial
destruction.” Financial professionals have created “derivatives of derivatives”
to further increase profits. However these are all powered by debt. At some
point debt has to be paid.
A large number of investors have been improving profits by
investing in low Volatility. Shorting VIX was the way this has been done. For
the last few years it has been an ideal bet. Or was until a week ago. Some investors have lost 80% in a week. Some funds
will liquidate and close.
Debt is the reason stocks fell so fast and may fall more.
The average of corrections is 16%, but no correction is average. The correction
may be done, or markets lose over 10% more into a recession (20% loss). Stock
markets may start climbing again next week or next year. Anyone who tells you they know what will happen next is lying. Which is why am diversified
and still investing for my retirement.
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