The markets' action tells me that the term "irrational exuberance" got finally buried on Thursday.
The market action is indeed most worrisome. When not even the gigantic injections of freshly digitized money by the Federal Reserve and the European Central bank to the tune of $150 billion on Thursday alone could quell the slide that continues in the Far East at the time of writing, then we have arrived at one of these moments where Mr. Market takes into hands what was left untouched by policymakers for too long.
Not that any of the facts that culminated in today's sell-off have not been known for a good length of time.
The Bubbles Are Bursting
Only 8 years in the making the new millennium has seen 2 major bubbles that led to a third. Housing was followed by M&A and both fed the hedge fund bubble.
As there is hardly an investor who does not have to serve some sort of credit line in a leveraged world where the notional sum of derivatives outpaces global GDP several times we can prepare for more of the same to come as margin calls will force investors into liquidations of their positions.
To see that not even the liquidity excesses of the central banks are of help leads to the sad confidence that we are going to enter a bear market.
A Bear Barket Is When Everyone Loses
Suddenly it looks as if there are no investment classes one could escape to. Wanna buy consumer stocks? There will be plenty of supply in the near future. Bank shares? They will come a lot cheaper once market players realize that credit risk ultimately means counterparty risk. What does an exploding OTC option help an investor when the issuer goes belly up? Next to this banks will be faced with damage payments coming from non risk-adjusted advice they have given out before in order to fuel the boom in low credit grade investments.
Don't take too much comfort from Thursday's good performance of 10-year US Treasuries. There was no other place that looked remotely as a safe haven like this segment and the initial reaction will fade once markets take a closer look at US debts and the fact that they cannot be repaid without a massive dose of inflation - that will inevitably lead to hyper inflation.
Even the traditionally ultimate store of value fared badly. Precious metals were hammered down in late Thursday trading. But I don't buy reports that this was the result of investors selling the physical. Ted Butler has written enough on the huge short positions in COMEX futures.
But while decliners outpaced advancers in gold and silver mining shares, the sector saw a bit of recovery and many shares closed above their lows, in stark contrast to Wall Street.
In general I wonder why there has been no flight to the real quality in this sector. Can you name any other companies involved in the process of directly producing real money?
Where Will This Lead To?
Verbal economic warfare has escalated in recent days. China threatened to dump its trillion of US debt and president Bush angered the Chinese by calling them foolhardy. Is he the right person to call others foolhardy? The Chinese don't have to sell. They just have to stop buying more US debt to show the USA that a debtor is never in the position do dictate terms unilaterally.
In the broader outlook we are entering uncharted territory insofar as China and India have not been part of the global economy during the last bear market in the 1970s. It has to be seen whether consumers in Asia can fill the gap that will be left by indebted US consumers.
Altogether I would say that nothing is contained in the current state of markets. The outfall from the housing bust is by now felt all over the world, spelling more doom to come.
Central bankers may have been successful in diminishing the status of gold and silver since 1930, replacing it with the Federal Reserve dollar. This is not the case in Asia where 3 billion people will stash more of it once the developing global financial crisis can be felt in their wallets.
The Middle East, long time a major dollar investor, is shifting away from the dollar too. Plans for more gold exchanges in these regions would not proceed if there was no demand.
Suggestions for other safe havens are most welcome in comments. As so many market observers I feel no lack of comprehension of events but I am still working on the solution.