Dennis Jones is a Jamaican-born international economist, who has lived most of the time in the UK and USA, and latterly in Guinea, west Africa. He moved back to the Caribbean in 2007. This blog contains his observations on life on this small eastern Caribbean island, as well as views on life and issues on a broader landscape, especially the Caribbean and Africa.







**You may contact me by e-mail at livinginbarbados[at]gmail[dot]com**

Thursday, October 09, 2008

Follow pattern kill Cadogan.

I'm beginning to get a better handle on Bajan phrases. The one in the title hit me in the eyes yesterday. I'm told that it is an old Bajan saying, and means you don't have to do what everybody else is doing. Jamaicans have their own version of the same phrase and idea. In Patois: "Look pon dis yah follow fashan bwoy a himitate fi mi style!"; or in standard (H)English: "You're too damn follow fashion. Everything you see me do, you do it too."

A lot of people live by the edict that what's good for the goose sometimes just isn't good for the gander, and for me and others that goes for if not all, then certainly many, aspects of life, including fashion.

It's a useful phrase that has its parallel in the current financial calamity that is hitting many of the world's equity and banking markets. We often talk about "herd mentality" when assessing the behaviour of participants in a market. A lot of investors are just capitulating and running for the door, in the same way that many jumped on the bandwagon in the first place. Bankers also acted in similar ways in getting into "sure fire winners" like sub-prime mortgage paper. (As an aside, I heard a really funny CNN report last night about how Nigeria's banks wanted to get into this area but were not strong enough at the time. Now they stand amongst one of the national banking systems that is relatively strong and immune from this particular wave of bad debt. Of course, Nigeria has plenty of other bad debt issues to deal with and nuff-nuff scams.)

Many who are regarded as far from the madding crowd, such as Warren Buffet, often astonish because they do not follow the rest. They look to get into deals when others feel it's time to pack up the chips (see chart). Current example: equity markets are tanking and the financial sector in particular is having some serious "bad haircut days", and Warren plumps up with a cool US$5 billion to buy shares in Goldman Sachs (in late September), then General Electric gave Buffet's firm Berkshire Hathaway the chance (warrants) to purchase $3 billion in shares. Now, many will have noticed that within days of striking these deals, Buffet was holding nearly instant paper profits worth over US$500 million, but these disappeared almost as rapidly during the past week as stock markets wiped the floor in the worst fall since the mid-1930s over the past week (see Bloomberg report).

People with deep pockets, like Buffet, are not into these things for the short run, so wont be blowing steam or sweating about what happens over a few days. His horizon is over years. If you have shallower pockets and the stomach to maybe see that the prices are not yet at their lowest--and there are plenty of indicators that suggest there will be a brief rally in stock markets before they go lower again--then be like Warren "Cadogan" and don't follow pattern.

Another thing that is clear is that fear is driving a lot of activity in financial markets, and fear leads many to flee rather than fight.

While I was writing this, all the supposed good news that was coming to the ears of market participants was being taken as a reason for more negative sentiment. By the end of the day, the Dow Industrial Industrial Average dumped another 679 points and went to a five- year low below 9,000 (8579); the S&P 500 has retreated on seven straight days, the longest losing streak since 1996, with declines exceeding 1 percent on all but one day. My friendly "fear index" was "flashing a signal that equities are very dangerous right now" (see report). It hit a new record, surpassing 60 during the day, and closing at over 63. No kidding when people say glibly that we are in uncharted territory!

I decided not to trade much today but to use the day as one of observation. I scalped a little though (meaning, made a few deals jumping in and out as prices could not figure out which way to go), as some interesting situations developed, and I played with my dummy account--where it's virtual (not real) money that's at stake. It was another very odd day of volatility in an already extraordinarily volatile week. Only one more day before the weekend.

During the weekend, the Finance Ministers of the major industrial countries, known as the G7, will meet in Washington DCand discuss many of the issues affecting financial markets. I see that my former employer, the IMF has drawn up emergency plans to bail out governments affected by the financial crisis, after warning yesterday that no country would be immune from the ripple effects of the credit crunch (see report). Iceland looks like it's on the verge of bankruptcy, and the government has just had to nationalize the three major banks. But I thought that countries couldn't go bankrupt. How the world is changing.

Maybe I wont be looking forward to the weekend.

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