Where have all the flowers gone?

"Where Have All the Flowers Gone" is a beautiful written by Pete Seeger song. I especially love the first verse

Where have all the flowers gone?
Long time passing
Where have all the flowers gone?
Long time ago
Where have all the flowers gone?
Girls have picked them every one
When will they ever learn?
When will they ever learn?



In the financial market, it seems that all the bulls have gone home and there's little place to hide in the waves of deleveraging we are going under. Fannie and Freddie in essence have been nationalised, Lehman posted over $3.9bn in Q3 loss and dark clouds seem to loom over every corner of the market.

In Bill Gross's latest Investment Outlook, he discussed the concept of "deleveraging" in great details. I think it is a great read for anyone who's cares about the impact and process of the financial turmoil the world is going through and will go through.

What Happens During Delevering
1. Risk spreads, liquidity spreads, volatility, term premiums – they all go up.

2. Delevering slows/stops when assets have been liquidated and/or sufficient capital has been raised to produce an equilibrium.

3. The raising of sufficient capital now depends on the entrance of new balance sheets. Absent that, prices of almost all assets will go down.

Remember the multiplier effect we learnt in A level economics? Roughly speaking, a small increase in any factor of AD (C + I + G + X) will result in large effect on the economy. The deleveraging process is like a negative multiplier effect as the negative impact of of asset worth feeds into other economic agent...and the process goes on and on.

Buffett has also been quoted that the pain of this correction will be "...will be deeper and last longer than many think." However, he also said that "If the world were falling apart I'd still invest in companies,". Some financial commentator came up with a nice analogy on Buffett's position on the state of the economy, instead of having a glass half full vs. glass half empty postition, he thinks that that its that "glass is cracked".
(for the Buffett-phile out there, this is an amazing site Warren Buffett Watch)

I think in general we should be long term optimist. It will do us great psychological damange to think that the world as we know it is going to end soon. Furthermore in the long run, it is amazing how human beings have been able to find new ways to inflict damange on ourselves, yet we're super resilient in coming back and surviving most of the self-inflicted wounds (and then find yet another way to self destruct).

When will we ever learn?
When will we ever learn?

I just might be a cocked eyed optimist.