Monday, 21 January 2008

Stock Markets and Multi-Vehicle Pile-Ups

Today's CBC web headline included a report about a monster multi-vehicle pile-up on highway 400. Thankfully, no one seems to have died. Having been in the middle of one such pile-up on the 401 a few years ago, I extend my sympathies to those involved. I remember the feeling of helpless foreboding in the brief moments after I had stopped safely - watching in the rear-view mirror while vehicles approached, hoping none was a semi-trailer going too fast, trying to guess whether I should move into the gap between vehicles ahead or stay where we were, or jump out and head to the ditch, though that would mean we were even more exposed. There was no long time to think, only seconds. As it was, we stayed put and sure enough, someone in an SUV couldn't quite stop and banged into our rear, smashing our plastic bumper, but we were ok and so were they. Not so lucky was the guy in a large pick-up a few hundred meters back, killed in the sandwich between two semis.

As an investor, I now feel much like that moment. The world financial pile-up has started, courtesy of financial institutions guilty of driving too fast with credit in conditions they should have seen were dicey. It started with the sub-prime mortgages in the US and the damage to many banks, hedge funds and investment houses has been in the news for months. The chain reaction continues, the latest crash of a semi being the downgrading of bond insurer Ambac and its follow-on effect on US municipal bonds. Ambac may be a blameless motorist on the financial highway yet it inflicts much destruction when it loses control. (btw, Credit to financial editor Robert Peston of the BBC for consistently exposing the consequences of the sub-prime induced meltdown in the UK and farther afield as his post on Ambac and MBIA attests). It just goes to show that one can follow all the safety procedures with a good vehicle (i.e. diversified portfolio) and behave cautiously yet still suffer collateral damage and be caught in a big mess that will take a while to clean up once the collisions have stopped, which obviously is still not the case. There's more market crashing going on today in Asia and throughout Europe. The market has shifted from greed to fear with good reason.

Unlike for my mini-van, I don't have portfolio insurance. Hmm, maybe I should get some, though it's a little late for this episode of financial highway mayhem.

Of course, we could all just stay home and invest in GICs, never taking the risks of travel, but then we wouldn't get anywhere interesting, would we?

2 comments:

Preet said...

Interesting analogy, and great read - loved the last paragraph!

Four Pillars said...

Great analogy and a very interesting post.

Mike

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