Replies

Because you’re seeing AAA-rated debt all over the bond market default. You’re seeing a systemic break down in debt markets, mostly due to “engineered” debt securities being illiquid crap, coupled with feckless incompetence or pay-to-play corruption at the three bond ratings agencies.

Most people think that the stock market is the big market in the world. The NYSE likes to make the retail investor believe that they’re the center of the financial universe.

Not so.

The bond markets in the US and London are the centers of the financial universe. If we want to describe the markets as a dog, the bond markets are the body of the dog. The stock market is the tail. And the commodities/futures markets are sorta like a twitchy nose on the dog.

The tail and the nose go where the body goes. The nose might influence where the body wants to go, but if the body doesn’t want to follow, all the nose can do is sniff the wind.

The tail just tells you whether the body and nose are happy, frightened, not amused or ready to take a dump. The tail cannot make the body do anything, all it can do is follow.

Since the Depression, there has never ever been a debt deflation like we’re seeing now. The financial world has this “recent data bias” of using almost exclusively post-WWII data for their estimations of whether markets are cheap/expensive or in a panic or wildly priced up. The whole of the US financial world seems to want to completely ignore the Depression as a base of statistical information, because they’ve all talked themselves into believing that “it can’t happen again.”

Well... it has. The Depression was a case of debt deflation, and what we have now is a case of debt deflation. When you hear these analysts on CNBC or Bloomberg (or Fox Biz) talk about “de-leveraging” — that’s financial lingo for “debt deflation.”

As a result of debt deflation, the financial world is seeing stuff that they’ve not seen before. Most of the people in finance are younger - say, 50 and below. They don’t know jack about the Depression - most of them learned about it in history class in high school, it isn’t discussed nearly enough in financial degree classes, if the gibber-jabber I see spewed on the financial channels by “professionals” is any indication of what is taught about the Depression in MBA or finance majors.

One of the things the financial world is seeing is the deadly combination of illiquid debt securities (like CDO’s) and leverage. When you’re levered up and your portfolio loses value, your margin lender can (and will) call you, the fund manager, and say “Hi there... margin call. We need $XXX before time HH:MM or we’re going to start selling what we need to in order to lower your leverage.” All summer long, hedge funds and others were getting calls like this - you could see this start to happen as the stock and commodities markets were selling off in increasing waves. The reason why we saw this was that stocks and commodities are liquid - when the markets are open, you can get a price and sell the stuff right now - in seconds, if not minutes for large block orders.

Try selling some of these thinly traded debt securities in a couple minutes — fat chance. You’ll take huge losses. This is the problem with thinly-traded securities. Imagine if someone came up to you and said “I need more money down on your mortgage by 5pm today — or we’re going to sell your house.” It is exactly the same type of thing - you can’t sell your house in one afternoon without taking a HUGE haircut in valuation. So you sell what you can that is more liquid for more reasonable prices - like your 401K, or your car, etc.

So this set the trap for the market: Along comes the fall of Lehman. These funds, banks, investment banks - they’re all bleeding out of their eye sockets due to these stupid illiquid debt securities, they’ve had to sell off their stock and commodity positions at increasing losses... and now comes word that money market funds are not safe. We’ve had money market funds “break the buck” before in the US — the last time was about 14 years ago, if I recall. It was a little ripple back then, because the markets were healthy; money was pulled out of that particular fund, the market went on.

But leading up to 9/15 to 9/16 — the market behavior was getting increasingly “out there in the thin tails” — ie, the statistical models (going back to the confirmation bias and deliberate decision to ignore and not use data from the 1930’s) of these wizards of wall street were all saying “We have no prediction for what happens next....” because the events we were and are seeing are not in post WWII model data sets - but some old fart (really old fart) who had been in the markets in the 1930’s would have told us exactly what to expect. That’s why I keep referencing Irving Fisher’s paper on debt deflations - Fisher studied the panics of 1929/1933, 1873, 1837, 1807, etc. They have a common pattern to them, and we’re seeing that pattern now.

Suddenly it is worth paying attention to the really old fogies with no hair or white hair. They’re the only people alive with some basis in experience for what we’re seeing.

Due to the recentcy bias in their models, suddenly there was no black box telling the young turks that this was a buy signal. It is like those older role-playing game maps with a big, dark area on the map that gives no detail; it says only “Here be dragons.”

Right now, there are banks withdrawing guidance on their bad loan losses — because their models don’t account for unemployment higher than 9%.

So they had to fall back on human judgment - and in this case, the judgment became panic.