Thursday, September 24, 2009

Quick Thought: Did We Just See Some Reflexivity In The Markets?

For those of you unfamiliar with reflexivity, and, in particular, George Soros's view, please take a moment to read this wiki entry. In essence, fundamentals affect prices, but prices affect fundamentals, too.

We have had deteriorating economic fundamentals for a while. The recession officially started in December of 2007, I think. The economic fundamentals- including too much debt- drove down equity prices quite a bit. It is not rare to see it called a "generational low."

Then, since March, we have had a huge run-up in prices (Fed pump discussions aside). Many companies, including the sickest of the sick, such as banks and REITs, jumped on the wagon and issued bucketloads of equity, and the new equity was often used to paid down debt.

What happened? The higher equity prices prompted new issuance which, in effect, led to a re-equitization, which de-risked the equity/improved the "fundamentals", making the equity potentially more valuable.

Reflexivity?

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