Few analysts do a better job than Graham Summers of Phoenix Capital Research in surveying the global economy and presenting its core problems in concise, easy to understand English.I appreciate the way he shears away the fluff and gets right down to the mutton.
Market insiders and sophisticated traders will probably find my post too rudimentary, but I aim my post toward Moms and Pops…and market watchers, like me, who often feel that the “talking heads” are talking too fast, and who seem to be talking over my head. I’ve come to realize that if a market expert leaves mystified, he/she has left me uninformed in an area that is critical to my welfare and wellbeing.
Summer’s article, “Another Triple Digit ‘2008 Trade’ Setup Has Just Hit,” appears in the June 15, 2016 issue of Gains Pains and Capital. In it there are three terms that are tossed off the tongues of many a talking head, but which might be clarified and explained for non-professional readers: “bubble,” “leverage,” and “derivative.”Â
Here’s the thought process I go though when I come across these terms:
1. A BUBBLE is an ephemeral, short-lived thing. Its surface appearance is beguilingly appealing and attractive, but it is a fragile, empty shell. And, so it is with economic bubbles such as the dot.com bubble of 2000, and the real estate/mortgage bubble seven years later. Investors pour excessive amounts of money into such bubbles, based on the unrealistic hope that those bubbles will always continue to generate enormous profits.When economic bubbles, supported by the economic policies of Central Banks (such as the Federal Reserve) pop, all the dollars invested in them also pop into thin air–along with the hopes of investors who “lose their shirts.”
2. LEVERAGE, in market lingo, simply means “borrowed.” Leveraging means to buy with borrowed money. “Leveraged” describes how much money has been borrowed.When we buy a house or automobile, we do it with borrowed money, so, we could say that our purchase/ownership is leveraged, or financed with borrowed funds.”Over-leveraged” means that someone or some entity has borrowed more than income and collateral would normally allow. Below, where you see that institutions are leveraged, say, 30:1 or 78:1, it means that the institution has borrowed 30 dollars or 78 dollars for every dollar of assets in its possession. If you and I had total assets of $1,000,000.00 and were leveraged 30:1, it would mean we’d borrowed much more than we should have–thirty times more than we could pay back from our assets. So, it’s easy to see which firms are in trouble because of the amount of borrowed funds they’re obligated to pay back from cash flow and other assets.
