The problem is self-reinforcing dynamics of "portfolio
insurance" like 1987, on a scale 100:1. This is due
to all the options selling for income in the last 5 years.
This provides increased stability of the markets to
SMALL declines, thus extremely low volativity in the
last 5 years (assuming this was NOT due to the Fed). If this
was NOT due to the Fed and Hank, then the sharp rallies
we've seen is due to options hedging/de-hedging.
However
once the move gets past a certain point (and NOW it does
seem we are past that point), 1987/1998 self-reinforcing
selling in the futures kicks in, and a bailout is needed to
get things rolling in the other direction. We had that
in 1987, when the Fed did not monitor the markets that closely,
then in 1998 with LTCM, when the bailout did come. Now the
problem is 10 times bigger. The same in currencies, only
that market is a lot bigger. That's why Yen volativity is
very dangerous.
If the Fed/treasury
is slow providing that right now, we could BK. More and more
$$$ are needed for it to work with every 100 points, or a huge
sentiment boost.
I can see US/European CBs are working on a bailout as we speak.
I expected that this week. However, is it too late? Is the
market too big for CBs? At some point it will be, since
the portfolio insurance grows exponentially, and every bailout
provides a huge BOOST to derivatives growth. Shall we BK now?
Who knows. The risk is much HIGHER than normal, but the NORMAL
risk of BK is 0.01% <G> |
