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Stock collapse: Oil, China or just stock market traders?

After a rough day in Bangkok, stock exchanges and currencies were slammed worldwide, as oil prices hit fresh 12-year lows.

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Global stock price plunge may just be "herding" behavior of stock traders, but if it lasts for long watch out: "low stock prices lasting for long lead to lower consumption, lower demand, and, potentially, to a recession."

STOCK MARKET & ECONOMICS

Global stock collapse: Oil, China or just stock market traders?

A sharp fall in stock prices at stock markets around the world is a major news story today (see here).

A collapse in oil prices and the stalling of economic growth in China are cited as reasons for the sharp fall.

There is, however, another possible explanation.

The behaviour of stock traders themselves may have caused the fall in stock prices.

Should we worry or not?

Olivier Blanchard, former chief economist at the IMF and professor of economics at MIT, assesses the situation:

"The Price of Oil, China, and Stock Market Herding: The stock market movements of the last two weeks are puzzling.

"Take the China explanation.

"A collapse of growth in China would indeed be a world changing event. But there is just no evidence of such a collapse. At most there is suggestive evidence of a mild slowdown, and even that is far from certain...

"Take the oil price explanation. It is even more puzzling.

"Traditionally, it was taken for granted that a decrease in the price of oil was good news for oil importing countries such as the United States [or Thailand]. ...

"We learned in the last year that, in the short run, the adverse effect on investment on energy producing firms could come quickly and temporarily slow down the effect, but this surely does not undo the general conclusion [that oil price decreases are good news, making energy costs lower].

"Yet the [news] headlines are now about low oil prices leading to low stock prices. ...

"Maybe we should not believe the [stock] market commentaries [in the news]

"Maybe it was neither oil nor China.

"Maybe what we are seeing is a delayed reaction to the slowdown in the world economy... Maybe…

HERDING BEHAVIOUR IN THE STOCK MARKET

"I think the explanation is largely elsewhere.

"I believe that to a large extent, herding [among stock traders in the stock market] is at play.

"If other investors sell, it must be because they know something you do not know.

"Thus, you should sell, and you do, and so down go stock prices.

"Why now?

"Perhaps because we have entered a period of higher uncertainty. ...

TWO SCENARIOS FROM ECONOMICS

"So how much should we worry?

"This is where economics ... gives the dreaded two-handed answer.

"If it becomes clear within a few days or a few weeks that fundamentals are in fact not so bad, stock prices will recover...

"If, however, the stock market slump lasts longer or gets worse, it can become self-fulfilling [a self-fulfilling prophecy].

"Low stock prices lasting for long lead to lower consumption, lower demand, and, potentially, to a recession.

"The ability of the Fed [the US central bank], fresh out of the zero lower bound [interest rates close to zero under Quantitative Easing (QE) monetary policy], to counteract a slowdown in demand remains limited.

One has to hope for the first scenario [that global economic fundamentals are, in fact, good], but worry about the second [scenario, that a stock slump might last for a long time and get worse].

(Source: Economist's View Blog here & Peterson Institute for International Economics here)

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Vocabulary:

adverse : having a negative or harmful effect on something - ในทางลบ, เป็นผลร้าย

assess (verb): to carefully consider a situation, person, or problem in order to make a judgment - ประเมิณ, ประเมิณสถานการณ์

at play : the reason why something happens or happened -

behaviour : the way that someone acts or behaves - พฤติกรรม, การกระทำตัว

believe : being fond and think of something to be right and will follow it - เชื่อใจ,ศรัทธา

central bank (noun): the main government bank in a country that controls the supply of loans (credit) and the supply of money in the country and provides financial services to the government and other banks - ธนาคารแห่งชาติ

certain : sure - แน่ใจ, แน่นอน

chief : a person with a high rank or the highest rank in a company or an organisation - หัวหน้า, ผู้นำ

cited : mentioned - ถูกอ้าง, ถูกกล่าวอ้าง

clear (adjective): easy to see and understand - ชัดเจน

collapse : falling down suddenly - การพังลงมา  

collapse : to fall down suddenly - พังลงมา  ล้ม, พังครืน

commentary : a newspaper article that discusses a subject and gives opinions about it - บทความแสดงข้อคิดเห็น, คำวิจารณ์

consumption : the act of using energy, food or materials; the amount used - การบริโภคพลังงาน, การใช้หมดไป

cost : an amount of money that people need to pay for something - ค่า

counteract : work against and change something -

delayed : happening at a later time than expected - เกิดขึ้นช้ากว่าปกติ

demand (noun): the need and desire of people to buy goods - อุปสงค์

dreaded : feared; frightening or worrying - ที่น่ากลัว น่ากังวลสุดขีด

economic (adj): connected with the trade, industry and development of wealth of a country, an area or a society - เกี่ยวกับเศรษฐกิจ, ในทางเศรษฐศาสตร์

economist : a person who studies or writes about economics - นักเศรษฐศาสตร์

effect : a change that somebody/something causes in somebody/something else; a result - ผลกระทบ

elsewhere : another place or other places - ที่อื่น

evidence : facts, signs or objects that make you believe that something is true - หลักฐาน,ข้อแสดง

explanation (noun): a description of how something happened or happens; giving the reasons why it happened - การอธิบาย, การชี้แจง, การขยายความ, คำอธิบาย

former : of or in an earlier time; before the present time or in the past - อดีต, แต่ก่อน

fresh : new; made or experienced recently - ใหม่, เมื่อเร็วๆนี้, สดๆ ร้อนๆ

fundamental : central; forming the necessary basis of something; serious and very important; affecting the most central and important parts of somethin - ซึ่งเป็นรากฐานสำคัญ, มูลฐาน

fundamentals (noun): things or factors that show whether something is healthy and in good condition, despite temporary bad conditions outside, in a market they compete in, for instance - ปัจจัยพื้นฐาน

global : throughout the world - ทั่วโลก

growth (noun): economic growth, an increase in economic activity - การเติบโต

headline : the title of a newspaper story that is printed in large letters - ข่าวพาดหัว

herd : to make animals move together as a group - ต้อนสัตว์

herding : animals moving together in a group - ต้อนสัตว์

hope (noun): a belief that something you want will happen; something that you wish for - ความหวัง

import : to buy or bring in products from another country - นำเข้า

in fact (adv): actually - โดยแท้จริงแล้ว, จริงๆ แล้ว

indeed : used to emphasize a positive statement or answer - อย่างแท้จริง, โดยแท้จริงแล้ว

interest rate : the percentage that a bank or other financial company charges you when you borrow money, or the percentage it pays you when you keep money in an account - อัตราดอกเบี้ย

investment (noun): the act of investing money in something - การลงทุน

investor : a person or organization that invests money, i.e., uses money with the aim of making a profit from it, for example by buying property or buying shares in a company - นักลงทุน

largely (adverb): mostly -

last : to continue for a particular length of time - กินเวลา

limit : to stop something from increasing beyond a particular amount or level - จำกัด

major : very large or important - สำคัญมาก

mild : not strong - เบา, ไม่หนัก, ไม่รุนแรง

monetary policy (noun): the policy of the central bank of a country to control the supply of loans and money in the economy - นโยบายการเงิน

period : a length of time in the life of a particular person or in the history of a particular country - ยุค, ช่วง, กาล

potentially : possible in the future - ที่อาจเกิดขึ้นได้

professor : a university teacher of the highest rank - ศาสตราจารย์

prophecy : a statement that something will happen in the future - การทำนาย, การพยากรณ์

puzzle : someone or something that you cannot understand - ปัญหาหรือสถานการณ์ที่ยากลำบาก

quantitative easing (noun): the current monetary of the US central bank, started after the 2008 global financial crisis -

reaction : the way something responds as a result of something that happens - ปฏิกิริยา การตอบสนอง, ปฏิกิริยาตอบโต้

reason (noun): why something happened or exists - เหตุผล

recession : a period when trade and industry are not successful and there is a lot of unemployment - ภาวะเศรษฐกิจถดถอย

recover (verb): to become normal and healthy again - ฟื้นฟูสภาพ, ฟื้นฟูร่างกาย

scenario (noun): a description of possible actions or events in the future - การสมมติสภาพที่เป็นไปได้

self-fulfilling : a self-fulfilling prophecy, a prediction that is not true at first but eventually causes itself to become true, due to positive feedback between belief and behavior (Source: Wikipedia on "self-fulfilling prophecy") -

sharp : sudden and rapid, especially of a change in something - ฉับพลัน, กะทันหัน

situation : all the circumstances and things that are happening at a particular time and in a particular place - สถานการณ์

slowdown (noun): when the economy moves more slowly and worker incomes and company profits suffer and increase more slowly -

slump : a period when an economy is much less successful than before and many people lose their jobs - ช่วงเศรษฐกิจตกต่ำ

stall (verb): to stop suddenly because of a lack of power or speed; to make a vehicle or engine do this - ทำให้เครื่องยนต์หยุดกลางคัน

stock market (noun): the business of buying and selling shares in companies and the place where this happens; a stock exchange - ตลาดหุ้น

suggestive : showing that the possibility that something is true, or evidence showing that something may be true ข้อชวนคิด -

taken for granted : expecting something to be there as it always is, such as an explanation or something you usually get -

temporarily : for a limited period of time - ชั่วคราว

the Fed : the Federal Reserve, the US central bank -

to a large extent : mostly -

trader : someone who buys and sells things - ผู้ค้า

traditionally : of something that has not changed for a long time - ตามที่ปฏิบัติกันมา

two-handed : having two parts -

uncertainty : something that you cannot be sure about; a situation that causes you to be or feel uncertain - ความไม่มั่นใจ (ต่อเหตุการณ์ ชะตาชีวิต ฯลฯ), ความรู้สึกไม่แน่ใจ

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