A Caution On A Broken Market


A Caution On A Broken Market

Posted by Karl Denninger

If this isn’t enough to give you nausea I don’t know what is:

Monday night into Tuesday, 1090 – 1035, a roughly 5% drop.  Then on Tuesday, a nearly 5% rise. 

Yesterday afternoon there was a rumor that China was “reviewing” it’s Euro Zone holdings, and into the bell the market sold off hard, down 3% from the top, and last night after the Chinese central bank “soothed” markets, we’re up the entire 3% we lost plus a bit more this morning.

As you can see a significant percentage of these moves are happening overnight, trapping the retail investor without a realistic ability to hedge.

The extreme volatility on nothing more than rumors bring back memories of 2007 and 2008, when Charlie Gasbag-a-rino was trotted out every time the market was down 200 points to claim that Ambac and MBIA would be bailed out “imminently”, stick-saving the market time after time.  You’d think that such rumors would “wear off” after a while when they didn’t materialize and nobody would believe (or act on) them any more.

You’d be wrong; it “worked” for months.

Then there was “Buffett Will Buy The World, including every insolvent bank in the United States.”  That one was good for huge ramp jobs too.

But those at least took place, for the most part, during the daytime.  These ramp jobs are all pretty much overnight events, and what’s worse, they’re all government interventions in one form or another by governments that have pretty much already blown their policy-making wads.

Those who believe “we’re in a new bull market” have some trouble with the facts here, particularly with squaring that belief against the ridiculous instability of the last few weeks.  Stable, recovering markets and economies don’t vomit up 5% of their value within a couple of hours, only to recover it all when someone comes out and says “oh yeah, we’ll find another trillion dollars laying around in the sock drawer for you.”

I remain firmly grounded in my belief that the odds of all these policy interventions fixing what ails the broader economy and markets is somewhere near zero – to within several decimal places.  The underlying issue is one of solvency; the path that nearly all western governments are on today leads to the same handbasket that Greece finds itself in.

In the meantime we have a President and Democrat Congress that clearly doesn’t get it, intending to put through yet another huge spending bill.  True to form our hypocritical government has Geithner shaking his finger at the Europeans – telling them to cut spending.

If you are wondering why the markets look like a roller coaster covered in vomit, this might have something to do with it. If we don’t get our house in order and stop acting as if we have an unlimited credit card we will soon feel a rhinoceros horn in a very unpleasant place, and instead of a market that contracts to a reasonable fair value consistent with private final demand (which still whacks 10% or so off GDP) we will instead watch 60-80% of our market’s value disappear.

Buckle up folks – the idiots in DC still don’t get it, and won’t until they get a forcible colonoscopy served by market forces they simply cannot control (hubris and arrogance aside.)

PS: The new Fed Z1 is due out in a couple of weeks, and will give us a good handle on exactly how bad it’s gotten – and is likely to get.  Watch for the update!