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This past week, the
commander of Thailand’s army unexpectedly staged a coup d’état and
ousted the government of Prime Minister Thaksin Shinawatra. The military
declared itself in control and instituted martial law across the nation.
In
addition, there was violence and widespread rioting in Budapest
following Hungarian Prime Minister Ferenc Gyurcsany’s taped admission
that he had misled voters about spending plans and had lied “day and
night” to win power ahead of last April’s elections.
Reports
also surfaced that one of the world’s largest hedge funds had lost
more than $5 billion—over half of its assets—in a matter of days
because of a bad bet in natural gas futures, despite the firm’s
billing as a sophisticated multi-strategy advisor with adequate risk
controls.
Meanwhile,
Yahoo's shares fell sharply after the technology bellwether lowered
earnings guidance for the third quarter and warned that online
advertising growth seemed to be slowing in some economically-sensitive
categories, including autos and financial services.
And
finally, the Federal Reserve Bank of Philadelphia reported a surprising
drop—in fact, the steepest monthly decline since January 2001—in its
general economic index, giving strong indications that the U.S. is
heading for a slowdown.
Taken
together, these seemingly unrelated events suggest that there has been
an abrupt change in the investment risk equation.
Yet
they come at a time when investors have been complacent, as evidenced by
the fact that share prices are near multi-year highs, the VIX Index, or
“fear gauge,” is not far from its 2006 lows, credit spreads are at
exuberant extremes, and the economy is widely seen as being in a
Goldilocks-like state.
Under
the circumstances, an apparent disconnect between expectations and
reality can sometimes trigger a dramatic reaction, where equity prices
fall, government bonds rise, and funds flow from risky securities,
sectors, markets and classes into safer ones—often in a very
disorderly fashion.
One
might call this a sudden recognition of risk, where investors learn the
hard way about the perils of taking too much for granted.
© 2006 Michael J. Panzner
Editorial Archive
Michael
Panzner is author of The
New Laws of the Stock Market Jungle: An Insider’s Guide to
Successful Investing in a Changing World
and a 20-year veteran of the stock, bond and currency markets. He
is currently at work on a book about global financial risks.
Contact
Information
Michael
J. Panzner
P.O. Box 115
Manhasset, NY 11030
Website
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