This is the big picture as I see it. A multi decade or multi century top in the stock market was reached on October 11, 2007. Up to that point, the tide was coming in for over 2 centuries. Now the tide is going out. When the tide is coming in, most everybody prospers. Idiots look like geniuses. When the tide goes out, most everybody loses. Geniuses look like idiots (see reference to Isaac Newton at the end of this post - thought by some to have one of the highest IQs of anyone who has ever lived). When the tide is coming in, the idea is to save for the rainy days. When the tide is going out, the idea is to preserve capital. Now it might be appropriate to quote a couple things Richard Russell has stated in the past few years.
Richard Russell wrote:Let me put it succinctly – There’s a hard rain a ‘comin’, and now it’s just beginning to sprinkle. Forget about creating profits, our job is to avoid losing purchasing power. ‘In a bear market everyone loses, but he who loses the least is the winner.’”
Once the tide starts to go out, everything gets turned on its head. What used to work doesn't work anymore. And even the opposite of what used to work may not work.
This juncture is more dangerous than anything I could have imagined. The US government has gone up to its eyeballs in debt and has no borrowing ammo left for the real crisis. At the same time interest rates on US government bonds have been falling for 4 months, indicating good demand for US debt as it appears to be the "least worst" alternative. T-bill rates went negative this week, which first happened during the Lehman crisis of September 2008 and is an indicator of the demand for short term liquidity (risk aversion). It means investment pros are willing to pay the US government to keep their money safe, as they see no better alternative but to lose some money by parking it in treasury bills, versus probably losing more somewhere else, which is exactly how this week went.
So far, the decline in the stock market has been orderly from the May high. Back in 2009, it was my opinion that any decline that held the March 2009 low would be orderly enough that the system would hold together well enough for shorts to get all their money out. Now I'm not so sure. I don't think the flash crash was a one off event, and what if the next one lasts 3 times as long and goes 9 times as far? I see no reason to think that can't happen. So part of what goes into my thinking is that if the S&P can't rally over the 1310 level from here, I am risk averse to the point that even if I think the market could crash from right here (which I sure do believe it can) there's a high enough chance that the shorts won't get paid to pull my money out and wait for things to settle down. Like I said in the other post, I haven't been ruined - yet. I have made some money since the 2007 top and would expect there are people here and there who have, despite their real estate holdings being in free fall. But the tide has barely started going out. Within the next 90 days, as I see it, the potential is there for trillions of dollars to suddenly disappear into a black hole.
So, yes, ultimately I do expect those posters from 2009 have properly framed the debate about the eventual resolution of this crisis and I'm not so sure that the shorts will come out of this in one piece even if they are right. That in my view is one aspect of the Priniciple of Maximum Ruin.http://www.google.com/search?q=%22daily ... 79&bih=426
See Figure 17.1 on page 116 which charts the September, 1720 crash of the South Sea Bubble.http://en.wikipedia.org/wiki/South_Sea_Company
Earlier in the year John Blunt had come up with an idea to prop up the share price—the company would lend people money to buy its shares. As a result, many shareholders could not pay for their shares other than by selling them.
Joseph Spence wrote that Lord Radnor reported to him "When Sir Isaac Newton was asked about the continuance of the rising of South Sea stock… He answered 'that he could not calculate the madness of people'." He is also quoted as stating, "I can calculate the movement of the stars, but not the madness of men". Newton's niece Catherine Conduitt reported that he "lost twenty thousand pounds. Of this, however, he never much liked to hear…"