Irrational Exuberance?

The troubles in the US sub-prime markets and the woes it has unleashed on financial markets all over the world, have become part of my daily consciousness since I started an internship at an Investment Management Firm. The credit crunch is indicative of the effects of unbridled optimism and excessive risk-taking that has gone bad. The granting of mortgage loans to people who would normally not qualify for such loans, i.e. who have subprime credit rating, is a very dangerous business. Nevertheless, these people were still granted the loan, and they went on a spending-party. While the party lasted, the markets benefited,because sub-prime loans provide greater returns than normal loans do. Homebuilders also benefited, as these loans unleashed a feverish pace of home-building and -improvement activities across the United States.

These "dangerous" loans were then securitised, repackaged and sold to gullible "alpha seeking" investors. And it was fine while the party lasted, new financial products were created,home-builders stocks soared and asset managers earned fat fees. Every investment firm rushed to create a sub-prime mortgage fund, and to provide a basis(or raw material) for these funds, more loans were parceled out to even riskier creditors. However, when the "shit hit the fan", this precarious arrangement collapsed like a pile of cards. and the result was chaos across various sectors and markets all over the United States and the world at large.

This "sub-prime fiasco" brings my mind to the Nigerian stock market, which has been growing at a dizzying rate and generating fabulous profits. The banks are on a capital raising binge, having developed almost overnight a glutonous appetite for capital. And everybody from the man on the street, to "alpha seeking" foreign emerging markets funds have been pouring money into the market. Stocks have been appreciating at a pace which is out of synch with prevailing economic circumstances. Looking at the valuations of the stockmarket, the paper frofits and the very optimistic statements of people who should know better. The words spoken by Alan Greenspan, at the height of the US dot-com boom, come to mind: "IRRATIONAL EXUBERANCE". I don't want to sound like a spioi sport, but I feel a major market correction will take place to "burst our boom". The fact that it is unlikely for us to have the capacity and ability to withstand a market meltdown,makes the situation very scary.