Is It October 16, 1987?

Black Monday, October 19, 1987

You have to wonder.

It’s options expiration and the market is collapsing, with German markets down 10% in two days.  Options protection is coming off today and the price of replacing it has skyrocketed.  Assuming the S&P 500 closes under 1178 this will be the fourth straight week of declines, with the market having lost more than 200 S&P points (and 1,600-odd DOW points.)

Now there’s a good counter-argument to be made on any sort of expectations of a crash – either today or Monday.  We’re well off the overnight lows in the futures – in fact, by more than 1% as I write this.    Why?  Simple: The market is severely oversold and the last thing a “late bear” wants is to get 30+ handles up his backside.

Now let’s set the table on some of the other things going on.  The Philly Fed number yesterday was horrifyingly bad.  There’s an old economic model out there, which has a high correlation, that strongly implies that we should print a non-farm payroll number of close to -750,000 this coming month!

Did your hair stand up when you read that?  Well, that model’s real, it’s got a good track record, and there’s been some chattering about it in the market among various people.  I don’t personally buy that this will happen, but…… oh, just for the record, Goldman knows this too, as do all the other big investment houses on the street.

Then there’s Europe, and that problem is real too.  It comes down to the same issue we have here in the United States: Banks are lying about asset values, and instead of allowing the market to force bad debt into the open and clear it, we find creative ways to allow institutions – and governments – to lie about that value.

The market knows this, of course, and it also knows that banks have ridiculously extreme leverage, enabled by the balance-sheet opacity and games in the derivative markets.  Rather than tell the banks to shut the hell up and eat their cooking, choking on it if necessary, we continue to knob-job them in our government offices.  This must stop both here and in Europe.

We’ve backed ourselves into a nasty corner by blowing more than $4.5 trillion in government deficit spending over the last three years and we got nothing for it.  Worse, The Fed has gone to zero interest rates and thus has little or no room to maneuver.  We didn’t stabilize the banks because we didn’t force the derivatives out into the open and clear them.  We didn’t stop high-frequency trading and other schemes, we enhanced them.  We didn’t force the housing market leverage out and allow the contraction in house prices to happen “fast and furious”, creating a durable market bottom and cheap housing for Americans (stable housing for families has public social benefits – high prices, leverage and extreme stress on household budgets, along with clouded titles and over a hundred thousand cases of perjury in the courts are social costs.)  We’ve done nothing about illegal immigration and the social costs these people impose on us (which we cannot afford), we have refused to take on the outrageous cost distortions in health care and education as that’s yet another pair of high-powered special interest lobbying groups and we have refused to tell the Chamber of Commerce to stuff their support for offshoring and cheap labor where the sun doesn’t shine.  On the latter point Henry Ford had it right – without good-paying jobs building things here there’s no money to buy the “stuff” that corporations want to sell.  This inevitably leads to more and more government deficit spending right up until the Ponzi collapses.  And finally our Seniors who didn’t do stupid things and have saved and invested have seen two market crashes in the last three years and they can’t earn any return at all in safe investments as CD interest rates are essentially zero.  This, of course, has everyone pumping gold – just wait until that collapses and all those who rushed in lose their money again.

Now the Ponzi is collapsing and everyone’s in a panic.

I told you so – four years back. In fact, I said so in the 1990s, but of course nobody wanted to hear it then, and the “rah rah”s when President Bush told us all to “go out and shop” were legion.  Last night Suze Orman was on CNBS once again pumping the “invest for the long haul” meme, but she didn’t bother looking at Japan’s Nikkei chart – if she had, with that 20 year time horizon, she would have blanched as following her advice would have cost an investor 75% of their money!  Are you ready, Washington, to stop with the partisan political crap and derision for basic mathematics and instead deal with the reality of things as they are, shutting down the Ponzi, closing the banks that need to be closed, forcing the leverage out of the system and having a clean conversation with the American people on what we want as goods and services from government with each item matched with current taxes sufficient to fund it – and all other spending stops?  Is Europe ready to do the same thing?

That’s what has to happen.  The market always calls all bluffs. The worst part of the market’s “all in” calls is that they come at the worst possible time – when you’ve exhausted your stack of chips playing games and scamming people.  The market never calls when you have plenty of reserve firepower; it instead quietly lets you expend that firepower with lies and deceit, and only when you’ve run out – or it thinks you have anyway – does the hammer come down.

The time is now and the question remains, given the market pattern and extreme volatility:  Given the lack of leadsership, given the plethora of lies, given the lack of apparent resource and will by governments to do the right thing and the inevitable squeeze of the truth in these institutions, Is Monday going to be “The One”?  (Black Monday October 19, 1987)

We’ll see.

Discussion (registration required to post)