Markets begins with one of the most common and important elements of the financial system – interest rates. You will learn why interest rates have always been a key barometer in determining the value of everything. You will explore the changing influence of interest rates; the impact of interest rates on consumption, investment and economic growth; and the bizarre realities of negative interest rates. Markets explains how interest rates change the value of all financial instruments, highlighting the role of the bond and stock markets that have toppled empires. We take a closer look at the equity pricing models and equity markets that reverberate across the globe, and explore everything from the first stock ever issued – by the Dutch East India Company – to the little-understood but powerful derivative securities market. By the end of the course, you will have developed insight into the intersections of the financial markets with worlds of policy, politics, and power. You will have demonstrated that insight by teaching an important financial concept and translating a financial product or transaction to someone who will clearly benefit from your advice.
Stocks: Turbulence
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來自 McMaster University 的課程
Finance for Everyone: Markets
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Week 3: Stocks
Week 3 is Stocks week! You will familiarize yourself with this market from its creation to present day, review key moments of market turbulence, develop skills for pricing stocks, and turn your MarketEx focus to experience stocks! As you explore all things stocks, you will continue to prepare your course culminating assignment.
與講師見面
Arshad AhmadProfessor
DeGroote School of Business
[MUSIC]
Most financial experts will tell you that when we take a very long view of
stock markets, they generally move upwards and
outperform all other investments in the long run.
But as the renowned British economist, John Maynard Keynes,
famously said, quote, in the long run, we are all dead, unquote.
Keynes of course was challenging standard economic thinking that claimed markets
will self-correct themselves into equilibrium or
balance if only society could wait.
He forcefully argued for immediate state intervention and literally invented
the subfield of macroeconomics, which studies how the whole economy operates.
Many of his ideas can be found in his classic work on the general theory of
employment, interest, and money, which was written in 1936 following
the greatest slump in economic history, also known as the Great Depression.
You don't have to work in finance to know that the financial markets
are volatile places.
Experts compare short term price fluctuations to random walks
with no discernible pattern or
trend, which makes it impossible to predict when to enter or exit the market.
Furthermore, acceptable volatility is in the eye of the beholder,
as recent history has several periods of longer than 10 years
when equity investors where in a slump.
That must have seemed like a long run to some.
Or consider Japan's infamous lost decade in the 90s when
this highly developed economy stagnated
severely after many years of strong growth following World War II.
So strong that it was considered the world's miracle economy.
Today, following the 2008 financial crash, many developed economies
are also trying to reduce, or deleverage debt, and are using unconventional
tools like quantitative easing, a fancy word for printing lots of money, and
negative interest rates to avoid being stuck in a deflationary spiral like Japan.
Thus, turbulence is a fundamental feature of global finance, and
the effects of this volatility can have widespread consequences at all levels of
economic activity, from individual investors to whole national economies.
In this segment, we sharpen our focus on the aftermath of turbulence and
less so on the conditions that lead to it.
Going back 250 years,
we revisit post turbulent periods that created precedents for bank bailouts,
modern exchanges, deposit insurance, and the separation of investment and
commercial banking and, now, quantitative easing and negative interest rates.
We can use these historical examples, and
the subsequent strategies in the aftermath, to help us learn from history,
and prepare for possible future financial turbulence ahead.
Let's begin by highlighting parts of an insightful essay on financial crisis in
The Economist magazine that argues finance has not only been
associated with crises, but more importantly, that crises shapes finance.
History shows that crises often follow a similar pattern.
Cheap money, low interest rates, a rapid expansion of credit and
borrowing, and all of this feeding eventual turbulence.
Then, once turbulence ensues, an air of confidence sets in, and
expectations of rising prices produces a speculative frenzy,
exaggerating volatility in the particular markets in question.
The first such scenario developed alongside the newly formed National Bank
of the United States that eventually led to the Panic of 1792.
This panic is highlighted as the first widespread bank run,
which occurs when banks don't have enough cash on hand to pay depositors who ask for
their money back.
In this case, the then Treasury Secretary Alexander Hamilton
stabilized the market by saving many of the banks, which set a precedent for
the financial system to rely on the state.
As with many financial crises that have followed since, the 1792 Panic
resulted in a swath of regulations that aimed at restricting trading and
preventing future slumps.
But financial actors often see such regulations as an overreaction,
and in 1792, this prompted 24 stockholders to meet under the famous
Buttonwood Tree at 68 Wall Street to start their own trading club,
which would eventually become the biggest organized exchange of all time,
The New York Stock Exchange, or the NYSE.
The second crisis in 1825 saw the Bank of England saving various banks who had
bought highly speculative bonds
which finance dubious investments in Latin American countries.
1 in 10 of these banks failed.
Blaming the commercial banks for the crises, the Bank of England encouraged
consolidation within the industry that produced very large mega banks.
Initially, mega banks created enormous profits and were revered worldwide.
Today's mega banks exert tremendous influence on international capital flows
and market power, but may not be revered as much,
given the failure of a few banks that can pose systemic risk to the entire economy.
This crisis of 1825 was an early example of moral hazard and
too big to fail theory, in which one takes risky action,
knowing that the consequences that will fall on the other,
typically the taxpayers, who are left to pick up the tab.
This is something we saw again in the 2008 subprime mortgage crisis.
Every subsequent decade after 1825 saw similar turbulence across Europe.
Three decades later, the integration of the world economy meant
that what would once be local panics, would now be interconnected globally.
In addition, related financial institutions such as insurance companies
and discount houses had also emerged as key players in financial markets, and by
1857, excessive borrowing and risk-taking resulted in a rash of bankruptcies.
This time, the state was not as quick to the rescue and
bankers were seen to adopt more prudent policies,
which might partly explain decades of financial calm that followed.
This relative long period of calm was appended by the Panic of 1907.
The NYSE lost almost half of its value.
Bank runs and defaults spread fear across 22,000 American banks.
Stability was restored through heroic interventions by major financiers,
like JP Morgan, and a commission was assigned to investigate the crisis.
This ultimately led to the creation of the American Federal Reserve system
commonly known today as the Feds.
By 1913 this system was being overseen by a board, an open market committee,
several federal reserve regional banks, and
other advisory councils, as well as the US Congress.
To this day, few people understand the structure.
In fact, the Fed's shareholders are private banks that receive a fixed
dividend of 6%.
Its close ties with commercial banks
make it unique compared to other central banks around the world.
And its actions during the 2008 crisis, as well as the unprecedented debt
the Feds have issued in recent years, raise red flags for some
about its debt capacity in case markets experience another period of turbulence.
Fast forward to the biggest collapse of them all,
the Great Depression that began in 1929 and lasted for 5 years.
It was likely triggered when the Fed raised interest rates to slow markets
of the roaring 20s, which was fueled by new technologies such as the radio,
new metals for manufacturing, and a revolution in aviation transportation.
Within a few months of the initial crash of October 24th, 1929, called
Black Thursday, the DOW had lost 45% of its value.
Exchange rates were reducing exports, and a wave of bank runs
flooded across Europe while 10,000 American banks failed.
All of this essentially destroyed confidence in the financial system.
The result was a severe economic depression in which
one out of four people were unemployed in the US.
Again, history repeated itself, and a host of reforms by the American government
under President Roosevelt followed.
Some of these include the Federal Deposit Insurance Program, which protects public
deposits, the Glass-Steagall legislation, which separated investment and
commercial banking, thereby reducing risk to the public, and a massive injection
of state subsidies of public capital for the financial industry to restore markets.
The history of financial crisis
goes even further back than the examples we've looked at here, and
includes many other notable events that we have not yet mentioned.
We had the Tulip Mania in Holland in 1637.
The Oil Crisis in the early 1970s.
The Mexican Peso, Russian Ruble and Asian financial crisis of the 90s.
As well as the DotCom Bubble at the turn of the millennium, featuring firms like
Netscape, Cisco, Enron, World Com and other technology giants.
All of these events eventually led to the collapse of significant market value.
So it's pretty scary to think that, for
many, these events have already become a distant memory.
Now for the one we all remember, the crisis of 2008.
In hindsight it all seemed so familiar.
The explosive lending of subprime loans, low interest rates making for cheap money,
mispricing risks through faulty ratings, regulatory and reporting failures, and
underestimating contractual risks all led to the big short.
This term captures how a select few rogue investors profited from the resulting
collapse of two powerful investment banks, Bear Stearns and Lehman Brothers.
Hollywood's version of events in the recent movie with the same title
is worth watching.
So is Meltdown, an excellent documentary, with seemingly new insights.
But the story is all too familiar.
Toxic financial products were tossed around in multiple mortgage insurance and
derivative markets, fueled by unscrupulous practices,
ultimately bringing financial markets to the brink of collapse.
Today, as in the past, some of the sharpest minds on
Earth continue to analyze data from financial markets.
This data is continuously changing as markets react to shocks, or
unanticipated news, that motivate the buying and
selling of financial products across the stock, bond, currency,
real estate, credit, commodities, in particular oil, and derivative markets.
When any of these markets react to unanticipated news there is a correction.
If it is significant, the state often intervenes.
For example, at the height of the 2008 crisis,
the feds immediately injected 700 billion dollars into the financial system
through the Troubled Asset Relief Program, or TARP, which has been
followed by more than 5 trillion dollars in additional federal stimulus spending.
And despite these efforts, we are only beginning to return to the pre-crisis
levels, slowly replacing the millions of lost jobs through sluggish
economic growth in the developed economies.
One clear lesson of all of these relates to our own disposition to news and
to our reliance on experts to figure it out for us.
Academic experts will tell you that top money managers do not
consistently outperform the general movement of a market index.
Indeed, the phrase, you cannot beat the market generally applies to everybody.
The alternative is to consider expert advice.
Look at the big picture, and use our own common sense.
This means building confidence along the way.
And one sure way of doing that is to keep asking good questions
about each of these markets until you have enough answers to form your own opinion.
Let me give you a couple of examples.
Why did the U.S.
stock markets crash at the beginning of 2016, and so quickly rebound thereafter?
Behind the financial noise,
was it because demand in China had dramatically decreased?
What about the unanticipated and
surprisingly poor economic performance indicators in the US?
Or the little effect the European Central Bank was having on
boosting Europe's lagging economies?
Well, all of these seem like reasonable explanations for
markets headings downwards.
But then everything changed.
As we learned, the American Feds were now doing a sort of 360,
abandoning their campaign to increase interest rates.
This quickly restored confidence, and the market started to bounce back.
What about the unprecedented fallen oil prices during the second half of 2015?
Here you might question the politics and not just the economics.
Is it coincidental that the Saudis and the US both wish to starve ISIS from
oil revenues, halt Iran from its nuclear program, and
squeeze Russia from its brazen actions in Crimea and in the Ukraine?
Some might find these geopolitical explanations plausible
to explain the sudden decrease in oil price.
On the other hand, you might think that this is a temporary blip and
that oil prices will likely increase because the growing energy demand in
China, in India, and other emerging markets is not going away.
Though many may expect a price increase,
it is anybody's guess as to know exactly when this is going to happen.
You might also question the reasons behind an abnormally strong US dollar.
And the currency was that seemed to be avoided at the most recent G20 meeting, or
how the Chinese yuanis now being pegged, or
connected to several currencies, instead of the usual state intervention,
which causes its devaluation, and so on and so forth.
My analysis, or anyone else's, is only one source of information,
which can at best help you form your own view.
But what is remarkable is how easily we can access reputable and diverse views and
engage with current events and formulate our own personal understanding
of the world of finance with thousands of colleagues in Finance For Everyone.
This is certainly better, a thousand times better, than allowing one accountant, or
one adviser, to decide about your money on your behalf.
Again, I think experts underestimate the common sense most of us are blessed with.
And that might be the most important lesson to learn from market turbulence,
which presents both a danger and an opportunity for all of us.
