What are "market forces"?

[BigBallinStalin]

I hear that term thrown around a lot, so I wonder:

what do "market forces" mean to you?




(picture related: That's me in real life!)

[shieldgenerator7]

market forces are factors that drive the economy.
things that corporations have to consider when making decisions

...and that picture looks so much like your avatar...

[Army of GOD]

Market forces are similar to magnetic forces, or electric forces.

[Haggis_McMutton]

Market forces are similar to magnetic forces, or electric forces.

I need formulas damnit!

[Army of GOD]

Market forces are similar to magnetic forces, or electric forces.

I need formulas damnit!

F_market=Impulse_stimulus/time

[john9blue]

market forces are not good, yet not evil. they cannot be bought or reasoned with

[BigBallinStalin]

I conclude that no one really knows on this fora (except maybe a few who have actually studied economics).

Therefore, whenever someone mentions "market forces" on the CC fora, keep in mind that they most likely have no idea what they're talking about.

[MeDeFe]

Market forces are whatever the richest 0.1% of the population say they are in order to blackmail politicians into voting for laws that are beneficial for the aforementioned 0.1%.

[natty dread]

I think they are some kind of fictitious forces, kinda like the coriolis force.

[jimboston]

COST = DEMAND / SUPPLY

The greater the Demand the higher the cost... the greater the Supply the lower the cost.

[Timminz]

The gravity of the below situation.

[Fruitcake]

In the run up to the sub prime mortgage crash my partners and I used this picture when we were discussing with our investors the position we had taken when we were short the CDOs (collateralised debt obligations) created not by the actual sub primes issued (there were never enough for the likes the banks issuing them), but the synthetic CDOs. Whilst we saw the old hag, the banks selling them at such low prices saw the beautiful young lady.

This was a classic case of two unstoppable (up to that point) market forces rushing headlong at each other. As with most events involving market forces this was a zero sum game. Up to the point some of us on the periphery of the financial industry saw this as complete insanity, every one else and their Mother thought this was the simple way to continue what had been an unstoppable bull run in property asset prices in the USA for nearly 2 generations. Market forces had started the ball rolling by having more assets than buyers for those assets. this force had been fed by the lowering of standards in lending. I can safely say the point at which we knew it had gone completely insane was in 2004 when the interest-only negative-amortizing adjustable-rate subprime mortgage was issued. In 2003 we reckoned borrowers had completely lost the plot, by 2005 we knew the lenders had.

Market forces are generally created from circumstance, then twisted by people until the market is no longer driven by natural economic laws (such as supply and demand) but by humans. You can apply this paradigm to most economic and business situations.

[Phatscotty]

I conclude that no one really knows on this fora (except maybe a few who have actually studied economics).

Therefore, whenever someone mentions "market forces" on the CC fora, keep in mind that they most likely have no idea what they're talking about.

likewise, if you are not an astro-physicist, you are unable to gaze at the stars or notice which direction they appear to move, nor are you able to feel the warmth or see the light of our sun.

sucks to be you!

[Phatscotty]

In the run up to the sub prime mortgage crash my partners and I used this picture when we were discussing with our investors the position we had taken when we were short the CDOs (collateralised debt obligations) created not by the actual sub primes issued (there were never enough for the likes the banks issuing them), but the synthetic CDOs. Whilst we saw the old hag, the banks selling them at such low prices saw the beautiful young lady.

This was a classic case of two unstoppable (up to that point) market forces rushing headlong at each other. As with most events involving market forces this was a zero sum game. Up to the point some of us on the periphery of the financial industry saw this as complete insanity, every one else and their Mother thought this was the simple way to continue what had been an unstoppable bull run in property asset prices in the USA for nearly 2 generations. Market forces had started the ball rolling by having more assets than buyers for those assets. this force had been fed by the lowering of standards in lending. I can safely say the point at which we knew it had gone completely insane was in 2004 when the interest-only negative-amortizing adjustable-rate subprime mortgage was issued. In 2003 we reckoned borrowers had completely lost the plot, by 2005 we knew the lenders had.

Market forces are generally created from circumstance, then twisted by people until the market is no longer driven by natural economic laws (such as supply and demand) but by humans. You can apply this paradigm to most economic and business situations.

Would you mind elaborating on what it was that allowed you to correctly see the old hag, and not the beautiful young lady? Specifically, in the knowledge/tools you and your people employed to view it correctly?

[BigBallinStalin]

I conclude that no one really knows on this fora (except maybe a few who have actually studied economics).

Therefore, whenever someone mentions "market forces" on the CC fora, keep in mind that they most likely have no idea what they're talking about.

likewise, if you are not an astro-physicist, you are unable to gaze at the stars or notice which direction they appear to move, nor are you able to feel the warmth or see the light of our sun.

sucks to be you!

I shit on your analogy, sir, because you've wrongly equated Astrophysics with merely looking at stars, feeling the warmth of the sun, or seeing the light of our sun.

It seems that you were upset from my previous comment. Perhaps, you should read some book on economics, instead of lashing at me with silly analogies.

Here:
The Economic Way of Thinking (2006 11th Paperback Edition)
http://www.amazon.com/Economic-Thinking-2006-11th-Paperback/dp/B002TL2A6U/ref=sr_1_5?ie=UTF8&qid=1304200471&sr=8-5-spell
About $30 used.


http://www.amazon.com/Modern-Principles-Microeconomics-Tyler-Cowen/dp/1429202483/ref=sr_1_8?ie=UTF8&qid=1304200534&sr=8-8
Used: $56



$86 and about 60 hours of studying ---> credible knowledge of economics
(That would be more than what 99% of people know about economics--that would include the president too)

[Fruitcake]

Would you mind elaborating on what it was that allowed you to correctly see the old hag, and not the beautiful young lady? Specifically, in the knowledge/tools you and your people employed to view it correctly?

Well this is quite a convoluted story, but I am happy to attempt some kind of synopsis. If I miss a few points you can't figure, please feel free to ask about them.

By way of background I have made a pretty good living out of studying financial market trends and seeing if there was a point in the future where a set of circumstances were to occur that would cause the trend to reverse in some way. By way of example I can use the Money Store. These guys seemed to have a pretty good grip on how to lend to bad credit risk sectors. However, during the 90s many lenders of that sector went bust. The Money Store came under investigation. This put the brakes on any value increase in the share price. We reviewed the base asset value and saw that the price then ($30 odd) was undervalued even if the due process went against them. So we went long on the shares whilst others were going short. We knew there was a fixed date in the future as the ruling was due to be issued within months. As it happens the case was thrown out (it involved poor lending practice, fraud etc) and the shares immediately went higher to around $50 at which point we exited.

Regarding the whole subprime mess it was a case of analysing what exactly was happening. In the build up to CDOs appearing what was happening was mortgages were being packaged into bonds. These carried 3 levels. At the bottom (normally around 20%) you had high return, but a higher risk of the bond collapsing in value due to the mortgages the bond was made up of defaulting. Then there was the middle sector which had a lesser chance, then the top slice which was meant to be pretty much triple A rated stuff. This was fine. But as the market heating accelerated we noticed the Credit rating agencies did not have a fiscal model but relied upon what the Bond issuers were telling them. (As an aside we had a saying that those who were clever went to Wall Street whilst those who didn't make the cut went to the credit agencies...there was good reason the Wall Street teams were making 7 figure incomes while the ratings teams made 5 figure incomes.) Anyway, I digress; when we noticed this we took closer interest in what was happening. This is where is starts getting bizarre. We flew an investigator out to the States and had him dig around various states to compare % defaults against what the Bond issuers were saying. In essence we realised that while credit risk ratings on households seemed fine on the surface, underlying this were zones of high default which were included within the bonds, furthermore, we found that the packages were done on FICO score averages. So if a Bond had a supposed average of 615 credit points per mortgage this concealed the reality that some of those borrowers had ratings as low as 500 points (which meant a close to certainty that they would default) so the Bond issuers would find a 730 point scorer to run alongside this so making the average palatable to the Bond buyers and the CDO issuer. Not only that but some of the risk ratings were based on 'thin' files. In this they were looking at say a Mexican immigrant (with full respect those people, this is in no way a deliberate insult) and 'thin filing' them by saying they never had a default or poor credit rating. With the very little evidence that was there (say borrowing and paying back a small loan or two) they would mark said person at a high mark. In short, the Credit rating agencies were not asking for individual FICO scores, but an average! (615 was the point at which a package of Bonds was scored as triple A). To add to this subprime mortgage bonds were not classed as 'mortgage bonds' but as 'asset backed securities' along with car loans, credit card loans etc. So in effect while our immigrant harvested crops etc, Wall Street harvested his credit score!

Now, there came a point at which some whizz thought up the idea of insuring these towers of bonds against default. The end insurer for many years was AIG. Wall Street banks created these bond towers, sold them then sold the insurance against them defaulting.
We realised that the risk of default was far higher than was being broadcast. It mattered not one jot that we told people as we were ignored as being periphery players with a few million in fund management against the billions, even trillions, enjoyed by the majors.
Then the banks realised that the amount of bonds being issued was chewing up the available market faster than loans could be issued. So they repackaged the lower levels of the bonds into new bonds with the same tiered approach as the old. The credit rating agencies, with no real fiscal model scored these new bonds the same way as the old....you can see it coming can't you....take $100M with $20M of high risk. Issue the Bond, insure against default. Rinse and repeat 1000 times. Then take the bottom $20M off all 1000 and you now have 200 new bonds of $100M each with what seems 80% good risk and the original $20,000M of bad risk has reduced, in the eyes of the outside world, to $4,000M. BUT THE PROBLEM IS THE SHIT IS STILL IN THE SYSTEM!!!!!!!!! We saw this and could not believe when we managed to buy CDOs (the insurance on the bond defaulting) for the same price as the earlier bonds! We were paying around 2% per annum in premiums. This meant we were getting 50/1 odds on a chance that was at best 5/1 to default! It seemed like crazy gang stuff to us. BUT HARDLY ANY ONE ELSE SEEMED TO SEE WHAT WE SAW. There we were, paying $10 million a year on $500 million worth of bonds.

It was never our intention to stay to the endgame. We knew that at some point someone would wake up and realise the risk outstanding to the likes of AIG. This happened when AIG suddenly stated they were no longer acting as the final insurer of the new bonds being issued. The Beautiful young lady had suddenly turned into the old hag we had been seeing for some time previously. In one week we had offers for over half our CDOs at an average rate of 4.6 times the total we had laid out for them!

The crazy thing was, the law never saw this as these were insurance contracts. So the likes of AIG could book the supposed future profit on the 2% income they were receiving within the year the CDO was issued. This meant their fixed income division became pretty much their highest earner....but it was all myth. Had the Banks been the insurers they would have had to reserve the risk on their balance sheets.

There is a lot more to the detail, but I hope this gives a very very brief thumbnail sketch as to where we were positioned in the whole 'old hag, young beauty' situation.

Edit: This is to show how truly bizzare this all got. When the realisation started to dawn on a few canny people in Wall Street, we were approached by the very banks who issued the bonds to invest in our fund. In short they had issued the bonds, got their cut, then wanted to cash in on our forsight in seeing that this was coming apart and make yet more money out of the complete horlicks they had made of things! Naturally we eschewed the offers as we had no wish to sleep with the devil.

[Phatscotty]

The shit is still in the system.

One follow up, was your team in the camp of expecting the US gov't to bail all this out in the end, and did that have any impact on what you guys were doing/not doing?

[Phatscotty]

I conclude that no one really knows on this fora (except maybe a few who have actually studied economics).

Therefore, whenever someone mentions "market forces" on the CC fora, keep in mind that they most likely have no idea what they're talking about.

likewise, if you are not an astro-physicist, you are unable to gaze at the stars or notice which direction they appear to move, nor are you able to feel the warmth or see the light of our sun.

sucks to be you!

I shit on your analogy, sir, because you've wrongly equated Astrophysics with merely looking at stars, feeling the warmth of the sun, or seeing the light of our sun.

It seems that you were upset from my previous comment. Perhaps, you should read some book on economics, instead of lashing at me with silly analogies.

If it ain't broke, don't try to fix it. I'm doing just fine in my own economic universe. I would rather you judge how correct or incorrect I am by comparing what I have said in the past to what has happened since, rather than what books I have read and what I got out of them. You don't have to focus on how I got there or why, because I am not the hippest to telling people my strategies and depending on my respect level for any given person at any given time might reflect my answers anyhow.

My point was you do not need to have an econ degree, or read any books, to feel the impact of a market force, or understand that a force is mostly good or mostly bad.

[MrBenn]

For the sake of not-having-read-the-thread-and-wanting-to-post-a-witticism:

[Fruitcake]

The shit is still in the system.

One follow up, was your team in the camp of expecting the US gov't to bail all this out in the end, and did that have any impact on what you guys were doing/not doing?

We weren't really concerned about whether the US Govt was going to bail the system. We were aware that the Bonds had been sold all over the world, with Europe being a big buyer of them(and for some odd reason Germany, but that's another story all together), so we did expect a reaction from the Europeans.

Our whole philosophy is always to get out before the final event occurs, so anything the 'final event' then causes is of little concern to us as a group. The reasoning behind this is so we can focus on the next thing rather than get tied up in the fall out. This applies to any transaction we are involved in, whether it is equity trades, bond trades, swaps, currency trades or any other trade. We have kept relatively small by delivering high returns in liquidity rather than building a too large an asset base which can become cumbersome. We do not even recommend where the client then places the 'dividend' as this would then place our decision in the hands of another who is likely less qualified than us anyway.

[Phatscotty]

The shit is still in the system.

One follow up, was your team in the camp of expecting the US gov't to bail all this out in the end, and did that have any impact on what you guys were doing/not doing?

We weren't really concerned about whether the US Govt was going to bail the system. We were aware that the Bonds had been sold all over the world, with Europe being a big buyer of them(and for some odd reason Germany, but that's another story all together), so we did expect a reaction from the Europeans.

Our whole philosophy is always to get out before the final event occurs, so anything the 'final event' then causes is of little concern to us as a group. The reasoning behind this is so we can focus on the next thing rather than get tied up in the fall out. This applies to any transaction we are involved in, whether it is equity trades, bond trades, swaps, currency trades or any other trade. We have kept relatively small by delivering high returns in liquidity rather than building a too large an asset base which can become cumbersome. We do not even recommend where the client then places the 'dividend' as this would then place our decision in the hands of another who is likely less qualified than us anyway.

Sharp. Would you care to offer the community your thoughts on commodities overall, specifically precious metals? If not, how much do I have to pay for a subscription?

I assume you guys are aware that the USD is about to test .72, the last level of support. I understand you are in Europe, this will affect the Euro a lot. Here, the way we dealt with it was to treat .74 like it was .72, and it failed miserably dropping all the way down to .73 by the end of the day. The fed is going to stop the bond buy-back program in June, but I fear they will just come up with a similar move to pump liquidity while calling it something else.

[Fruitcake]

My point was you do not need to have an econ degree, or read any books, to feel the impact of a market force, or understand that a force is mostly good or mostly bad.

Without wanting to get into a long philosophical discussion about this, I have to agree with you Ps. I am not an economics major, or a business major even. I have worked, in the main, on instinct throughout my life. If something crows in the morning, clucks and pecks at the dirt then nobody is going to convince me it is a duck, no matter how well qualified in ornithology they may seem.

[Fruitcake]

The shit is still in the system.

One follow up, was your team in the camp of expecting the US gov't to bail all this out in the end, and did that have any impact on what you guys were doing/not doing?

We weren't really concerned about whether the US Govt was going to bail the system. We were aware that the Bonds had been sold all over the world, with Europe being a big buyer of them(and for some odd reason Germany, but that's another story all together), so we did expect a reaction from the Europeans.

Our whole philosophy is always to get out before the final event occurs, so anything the 'final event' then causes is of little concern to us as a group. The reasoning behind this is so we can focus on the next thing rather than get tied up in the fall out. This applies to any transaction we are involved in, whether it is equity trades, bond trades, swaps, currency trades or any other trade. We have kept relatively small by delivering high returns in liquidity rather than building a too large an asset base which can become cumbersome. We do not even recommend where the client then places the 'dividend' as this would then place our decision in the hands of another who is likely less qualified than us anyway.

Sharp. Would you care to offer the community your thoughts on commodities overall, specifically precious metals? If not, how much do I have to pay for a subscription?

I assume you guys are aware that the USD is about to test .72, the last level of support. I understand you are in Europe, this will affect the Euro a lot. Here, the way we dealt with it was to treat .74 like it was .72, and it failed miserably dropping all the way down to .73 by the end of the day. The fed is going to stop the bond buy-back program in June, but I fear they will just come up with a similar move to pump liquidity while calling it something else.

Well, personally, and I have gone out on a limb somewhat over this. I have taken a position against the Euro. I am in the Sterling area anyway but I try to avoid dealing in my home currency for reasons that go against everything I do. I am still of the belief the Euro will reverse at some point in the not too distant future as the whole situation in Europe does not bear close scrutiny. The only thing gluing that zone together is political will and if nothing else this would cause me to short. I mentioned in the 'Ireland' thread I had also taken the reverse position with the Dollar. I believe the fundamentals of the USA are ultimately stronger than the Euro and have, since posting in that thread, increased my position both ways. If the LID happens, I will take something of a bath on the whole thing, but, as is my philosophy, the downside is limited to less than the upside barring a complete collapse of the Dollar which is highly unlikely as countries like China cannot afford for that to happen due to their currency holdings or Sovereign funds who have invested heavily in US industry.

I am nervous about the value of Gold as I feel it has got seriously overvalued but have not involved myself neither has my group. I am not the team expert on metals and he has not, as yet, recommended any move into the market apart from smallish positions we take on a JIC basis.

EDIT: I will remind you of the old law about precious metals generally. When interest rates rise, precious metal values fall.......

[Mr_Adams]

My gut feeling would go with you on the gold being overvalued. I see it as a bubble, like the housing market.

[Phatscotty]

Waiting patiently, which is why I hold that, until I see the first red flag that could possibly lead to interest rates rising, people are close to safe in gold and silver. I equate red flags with US gov't spending cuts, the end of QE, de-petrodollarification on a large scale, technical support in the USD, increased foreign bond purchases etc. There are rumors concerning some of these, and others are coming to fruition on small scales, but overall I don't think the dollar is going to hold at .72. I would put precious metals at close to safe rather than safe, although I admit the explosion in the prices does make me nervous based on price and gains alone. However, I expect one more "major event" to come through pretty soon, and that is the top of the US bond market, which you might agree is interchangible with your statement of increasing interest rates. (not to confuse, but now we have to consider if the gov't will interfere and rob us of the free market expectations and make it an artificial market IE cdo's). At that point, I think precious metals will have a last spectacular, once in a life time shot to the moon, and then it will crash for a generation but probably stabilze around 1800-2200, bar of course the USD crash or a strong SDR.

My guys have been over 85% heavy in precious metals since 2001. about 1 in 100 passed on gold at 260 and silver at 3.50, but now 30 of those hundred must have precious metals and they dont care how much it costs, another sign for me. But I have always expected the sheep to come in in the end and blow the top out of the bubble in remarkible fashion. I will tell people to exit hopefully before that

of course, this whole post is priced in USD