The limitation of Market Valuation
Market valuation by stock price * number of shares is misleading, because not all shares can be sold on the same quoted market price at the same time. Once large volume of dumping emerged, the stock price is definitely going to drop significantly.
An estimation can be made by multiplying market value by a factor, say 0.7.
The Nature of Equity Investment
- Source of Income (dividend, earnings)
- Marketable Security
The underlying substance of knowledge
- Cause-and-effect relationship among events
- Distribution of possible outcomes on certain event
The underlying utility of knowledge
- Analysis of the past, revealing what happened.
Economic Downturn Periods
- Financial Crisis of 2007 - 2008 (2008 Financial Crisis, lead to the Great Recession)
Strong Foreigh Capital Inflow can help keep long-term interest rate low despect the Fed kept raising short-term rate.
The Inherent Inevitability of Crisis
If the danger of crisis was fully recognized by related party, it would never happen. Crisi usually happens when situation looks good, when the potential of crisis was not be foreseen by the authority. Therefore, crisis is very likely to happen even when authority claims everything will be fine (out of true heart or not).
Financial Crisis happens when Big Financial Giant cannot meet obligations (fulfill contracts). To meet these obligations, large amount of financial assets have to be sold, which drives down asset price.
When yield curve flatten, holding short-term assets becomes attractive since their yield increases.
The contagious of 2008 financial crisis
European banks invested in the U.S. subprime mortage market sufferred great losses. The tightening money market in U.S. crippled some European banks who rely on the U.S. financial market to raise short-term fund and maintain liquidity.
Structured Investment Vehicle
Borrowing short-term to invest long-term, by entities established off-shore to avoid regulations
Any subordinate debt or preferred equity instructment that represents a claim on a company's assets which is senior only to that of the common shares.
The U.S government saved U.S. auto industry by providing loans from government fund
The ultimate Loss
Government assistantace and the act of bail out will ultimately impose the loss on taxpayers, non the less the currency depreciation. Those suffers also includes foreign U.S. currency and bond holers
货币贬值 --> 金价大涨(保值)
- 国内: 通货膨胀
- 国外: 大宗商品价格上涨（黄金、石油等），对一揽子货币贬值
The Underlying Cause of 2008-2011 financial crisis
- Tremendous misestimation and Ignorance of the Risk related to mortage related financial assets.
- Leveraged Investing
Classic Sign of Buble
New buyers flooded the market, many of them have no prior experience.
The Substance of Financial Crisis
The deveraging process is the process of contracting balance sheet for every participants in the credit market, as large scale credit defaults occuried.
As the overall capital in the economy stay unchanged, the real impack to the market is investor faith and the failure of systematically important institutions.
The collapse of faith is usually followed by a strain of liquidity, which spread the crisis to non-financial sectors.
It is organization, not medium of storage, that really matters in periodical recording of information.
Bonus Army Conflict