The Core of the Problem...

The headline to today's FT says it all:

"Investors Flee Risky Assets"

Why is this the core of the problem?


First of all, the "investors" aren't investors: they are speculators. They didn't buy something that generated a cash flow, they bought something on speculation that its value would rise.

Second: what the hell is a "risky asset"?

An asset is something you own and is calculated, in the greater scheme of things, against your liabilities (things you owe) to give you an idea of your financial situation (i.e., do you, at the end of the day, have money, or do you owe more than you are worth?).

As such, no asset is risky: what is risky is the potential changes in the value of the asset. There is nothing particularly risky in and of the asset itself, be it stocks or bonds: what is at risk is the future value of such assets. That's been at the core of the speculative wave of the last 15 years, and those speculators now have the very real fear of losing it all. That's what's driving the market changes of the last few days.

Hence the headline really should be:

"Speculators Sell Off in Fear"

That's what's really happening.

The storybook fable of recent years, that you can hedge and fudge your speculative activity by finding someone who was willing to bet that you're wrong and he is right, is over. People in the markets have made - and lost - fortunes by playing with increasingly sophisticated bets.

But these folks aren't investors. They're speculators. There's a world of difference, and the sooner that people realize that you can only afford to speculate with money you are also willing to lose completely, the better.