Opportunity Amid the Ruins - Barron's Online

One fund manager thinks that all this noise about writeoffs is really just a psychological thing - no money is changing hands here and losses aren't "real."

Hopefully his stock PZN is of the same opinion - it is down by almost 50%. 

But they're still reporting losses.

They are taking accounting losses. They haven't taken real losses. The situation was exacerbated by changes in accounting rules. Since the last banking crisis almost 20 years ago, two things have changed dramatically. Banks don't lend money anymore so much as arrange loans and then sell them through securities transactions and derivatives to other investors. Thus, they tend to have less on their balance sheets. And, they have to mark their portfolios to market based on psychological perceptions of the loans' value. If banks had to do this in prior cycles, there isn't one of them that would have survived. And yet they all survived, because they don't lose the money everybody thinks they lose. Some of these losses will turn into real losses, but the provisions the banks have taken against their earnings, which are a function of widening credit spreads and interest-rate changes, cause them to mark down their portfolios. Look at it this way: If you were a corporation that invested $100 in a U.S. Treasury bond that paid 5% interest, you'd get $5 a year. If interest rates go to 6% you have to mark down the value of the bond, even though you're still going to earn the same $5 a year.

Source: Opportunity Amid the Ruins - Barron's Online

So what if the losses aren't real?  In terms of accounting rule changes, one rule caused a mass exit of the USD.  Nixon's abolishment of the gold standard.  This wasn't real until it happened 17 months later.  But the mere idea and shock of this proclamation caused a big stir in world markets.  Things don't have to be real in capital markets... heresay is enough to move prices. 

Similar echoes happened two years ago, when the Great Halloween Income Trust Proclamation was released by the Canadian Finance Minister.  Immediately a massive drop in paper values translated into a real value decline of the investments of many trusts.

Another rule that moved markets and destroyed value?  Immediate criminalization of online poker.  That didn't work so well for companies dedicated to online gaming... but it probably will when the brick and mortar casinos & big media players get into the game.

Perhaps the most important way to invest in the stock market is to watch what is happening in international politics, particularly with the ongoing currency and liquidity wars.  And perhaps inflation can be monitored by watching the minimum wage scale...

But watch out... Some countries are more effective than others at enforcing these regulations, so that the effective minimum wage may be lower than the official one.

Capital markets are all about regulations and the movement of money into "self"-regulating countries.