@market bounce -- trotsky, 17:04:33 02/28/07 Wed
voy.com
is this bounce trustworthy? frankly, i doubt it. the VIX reached a mere 18 yesterday - far from the levels that would indicate a true capitulation marked by excessive fear.
the problems that were at the root of yesterday's plunge (namely, the seizing up of the housing ATM as Fleckenstein refers to it) haven't gone away - far from it. they are bound to get worse, and the plunge in new home sales is a good indicator that this sector of the economy is now in full credit crunch conditions.
note also that banks will be forced to raise loan loss reserves. this will make their so-called 'earnings' disappear overnight. if you ever wondered how banks could constantly meet earnings targets with an inverted yield curve, here's your answer: they dramatically reduced loan loss reserves, which are now at a record low, to pad their reported eps.
really, China's plunge was merely an excuse - a trigger - but not the cause of the decline.
when the financial sector gets into trouble, as now seems to be the case, an economy and market that depend entirely on forever rising asset prices and credit that continually expands at multiples of GDP growth are bound to get into trouble as well.
it is important to remember that what is played here is the ultimate confidence game - beginning with the dubious monetary unit in which everything is priced, up to the complex derivatives and massively leveraged market positions that populate portfolios across the financial sector (and elsewhere - even municipalities are speculating in interest rate derivatives after all, without understanding them one whit). it ALL hinges not only on the confidence of each individual player, but also on each player's confidence that the confidence of OTHER players will stay intact.
consequently, it is quite possible that a market defies disturbing developments for a while, just as long as all and sundry can convince each other that they 'don't matter' or that trouble at one end of the house of cards won't propagate to the other.
however, there clearly is a limit to this, just as there is a limit to any kind of Ponzi scheme. consider for a moment that yesterday's action really was but a temporary loss of confidence...a 'momentary lapse of reason' as most market participants would likely characterize it with hindsight.
market moves have however very little to do with reason, and everything with emotions. thus all the rationalizations in the world won't be able to put humpty dumpty together again should confidence be truly lost.
actually, from my PoV, yesterday was when reason made a brief reappearance on the scene, and today it was temporarily lost again. |
