How the stock market’s bubble burst

[sparklingway]

How the stock market’s bubble burst​

By Ahmad Gehla

June 28, 2010

KARACHI: In 2007 Pakistani markets witnessed an unprecedented event, capitalisation increased to 49.2 per cent. Stock market values registered a two-fold increase in overall index value but this rise in value was created without any real produce and so inflation also peaked. Pakistan had made money out of thin air; the country had gotten something for nothing.

The stock market’s capitalisation and worth had already increased by massive degrees during Shaukat Aziz’s term as Pakistan’s finance minister who led the privatisation of state owned banks. After being privatised the banks started pumping funds into the stock market through their own investment companies. As a result the stock market’s capitalisation grew from 14.1 per cent in 2002 to 19.9 per cent the next year. When Aziz became prime minister in 2004 market capitalisation increased even further to 29.9 per cent. Capitalisation continued to increase during his term, rising to 42, 35 and 49.2 per cent in 2005, 2006 and 2007.

This artificial boom led to a massive campaign in consumer finance by banks. With everyone under the false impression of economic progress some consumer goods sectors actually did benefit from this fake rally.

Foreign investors and other beneficiaries packed their bags after earning hefty profits as soon as the stock market’s bubble burst. The crash resulted in a collapse of Pakistan’s already traumatised foreign exchange reserves and a 30 per cent devaluation in the rupee. Pakistan was soon knocking on the doors of IMF and other Friends of Democratic Pakistan for aid once again.

If we assume that an increase of 1,000 points in the index requires fresh investments of $0.8 billion, then the rise of 11,000 in the index should have added about $40 billion to the profits earned by stock traders.

This is equivalent to the total value of the country’s export over four years. The impact of this wealth being created without any real production of value is phenomenal. Inflation rose 30 per cent, the number of those under the poverty line doubled and the rupee went down by a massive amount.

The unkindest cut of all is that traders make profits through short selling even when market falls. They sell at higher prices when they realise that a stock is going down absolving themselves of any repercussions. This is why the notorious stock market crash of 2006 is said to have been master minded.

Bankers and brokers made $50 billion, the independent judiciary which was restored so that they investigate the scan has done nothing but pursue President Asif Ali Zardari’s $60 million assets.

Shockingly the practice of making money magically appear out nowhere continues. Groups of overseas Pakistani’s with hedge funds, local investment companies, brokers and banks are reportedly involved.

Gains made from the markets ups and downs are later remitted overseas in the form of foreign exchange. This results in the devaluation of the rupee and puts pressure on foreign exchange reserves. The remainder of this artificial money is entered in to the accounts of bankers and brokers – fuelling inflation and making life more difficult for the poor.

Published in The Express Tribune, June 28th, 2010.

 

[Hulk]

Well it is really sad, but it is a fact that some people play with lives of others.

 

[sparklingway]

Well it is really sad, but it is a fact that some people play with lives of others.

It is sadder when the no-tax paying, "educated", urban middle class is unable to see willfully or otherwise, that it is people amongst them who are ripping off the state, exploiting the masses and looting the national wealth.

Our stock market is a casino (not to say that all aren't but ours is a way bigger casino). Insider trading is rampant. Big stockbrokers got away twice with very, very, very big stock market crashes in which they sold short and accumulated billions. Moreover, most of the "foreign investment" in the stock market is by funds where many of the local big stock brokers themselves sit. As with the Shaukat Azizian school of thought, "foreign investors" are accommodated rather easily, it is easy for them to take out the money.

The stock market has crashed more than enough, with clear and crystal proof of crimes committed and even then the legislative power remains minimal. The application of the CGT and the furor that could be heard amongst not only the investors and the brokers but the media was a visible sign that everybody has a share in the non-imposition of CGT. The criminals of the earlier crash went scot free thanks to their buddy Shaukat Aziz and the whole imported financial gurus.

The self styled "educated" public (which composes almost all members here) still do not understand what the stock market bubble did to the economy and most of the Azizian and Musharrafite delusionals are so illiterate when it comes to economic understanding that they cite stock market capitalization as proof of "development".

Unless and until the people start realizing what the brokers did to the economy, there is no hope for a better public understanding of the economy and the direction the national economy should take.

The best part is that income on stock gains was tax free throughout the Azizian years (in addition to the wealth tax being eliminated). People are busy crying out Zardari took millions, Ashraf took millions and are unable to see that the stock brokers took away billions out of the economy and are never portrayed as criminals, as looter, as corrupt stock market gurus or as the devil. I'm not saying that public officials should somehow be subjected a smaller level of scrutiny but our obsession with the political class creates an environment where the private sector is never portrayed as the participating evil (who pays the bribes?). People still view the robber barons as "hardworking" while it's the grease palming and under-hand payments that produce the profits.

The stock barons are no angels but rather devils but in Pakistan nobody portrays them as such thanks to our obsession with "corrupt politician", our unwillingness to participate in a democracy, the national culture of law breaking and tax evasion and the lax moral standards that people have for each other.

 

[H2O3C4Nitrogen]

yup its artificial and only the big fishes benefit from that fake drama..!

 

[ramu]

yup its artificial and only the big fishes benefit from that fake drama..!

Not really ... I am a small fish and I have befitted immensely from the stock market.

 

[sparklingway]

Not really ... I am a small fish and I have befitted immensely from the stock market.

You did not become a billionaire (or why would you be here ). My investment has yielded profits but I'm no robber baron. Small investors like me lost quite a bit in the crashes in which short selling and insider trading profited a lot.

 

[Hulk]

Not really ... I am a small fish and I have befitted immensely from the stock market.

Its not impossible if you are in same boats as planners.

 

[ramu]

You did not become a billionaire (or why would you be here ). My investment has yielded profits but I'm no robber baron. Small investors like me lost quite a bit in the crashes in which short selling and insider trading profited a lot.

Ya, you are right , I am just a few zeros away.


If I became a billionaire, you will then put me in a big fish category... I am a small fish and have earned returns that far exceed most published mutual fund returns in the last ten years.

 

[sparklingway]

I am a small fish and have earned returns that far exceed most published mutual fund returns in the last ten years.

I'm not a really avid follower hence invest only in mutual funds. Have been thinking of investing something in SENSEX as well.

 

[Hasnain2009]

So u think stock market growth was artificial? Do u really think $80bn market can be artificially sustained by the poor govt like pakistan? And for the market crash, i think it was happened bcoz of uncertainty/law and order and fear of losing musharraf and corrupt people like Nawaz Sharif or Zardari gaining power, thats why market crashed, all anti-Musharraf people says that stock market growth was artificial, can they justify that economic growth of over 8 percent for year 2005? Can they prove false that when nawaz sharif left, over 60% of GDP was under debt, and when musharraf resigned it was near 23% or 27% of GDP only, can they prove growth of middle class and decrease of poverty was artificial? Can they prove wrong reports by international organizations which considered pakistan in the list of NEXT 11 countries along China, India, Brazil bcoz of economic progress? Can they prove wrong the increasing GDP per capita which was around $467 in 1999 and over $1000USD(more then double) when musharraf left. Can they prove wrong the GDP growth, as pakistan's GDP in 1999 was $63bn and when musharraf left it was increased three fold to $165bn!

Listen dude all these reports are presented to defame musharraf, these reports are far from reality! This all is just fake propaganda!

 

[Hasnain2009]

^^someone answer my above most, feel free to dis agree!