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blog by Arbitrage Wise Has the SL Financial economy bottomed out? Has the SL stock bubble burst? If we compare some of the events that have happened recently to the RL US economy, then I would say that there should be some relative confidence that the answer to both questions is 'Yes'.
One of the causes of the recent burst in the US economy was due to the loose monetary policy by the FEDS, meaning that the FEDS lowered their interest rate to financial institutions. This meant that more banks were borrowing more money since the cost of money is lower. As a result, banks made more bad investments, such as investing in Collateralized Debt Obligations and Mortgage-Backed Securities from other companies. If we correlate this to SL, we can see similar events happening in the past. In the early days of WSE, money was more abundant, which created a moral hazard as companies IPO'ed left and right, and new companies doing an IPO to invest in currently IPO'ed company. As a result, a bubble was being created where simply the success of one IPO inflated the value of another IPO or company, which inflated the value of another company, and so forth. Few companies had any strong value proposition or fundamentals to generate a profit. Once the money started tightening up, the inflated value of these companies started going down, and eventually, the bubble burst. While many investors were hurt in this bubble burst (as in any bubble), more people will benefit in the long run as funds are now directed towards wealth-generating investments with companies that will actually contribute to the SL Economy. Yes, there are fewer successful IPOs. But we can be confident that the successful ones are not faux companies, but are ones based on strong business models and fundamentals. With frauds no longer rampant, and the SL economy having finally been cleansed, I am confident that SL has bottomed out, and we can turn the page to see the true SL economy emerge. It will take time, but true wealth cannot be generated over night. Cheers to those that survived the bubble!
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