Market Crashes and Liquidity

VIX is at 23.81 - more than double it's recent "normal" levels. Emerging markets are discounted by 30, 40, even 50% (Turkey, Russia). Inflation is a real threat, interest rates are an unstoppable freight train, the last outpost of income - real estate - is agreed upon as inevitably "doomed", Oil shortages, etc., etc., etc.

Question: In the backdrop of all these wonderful things, why haven't we crashed?

Answer: With all due respect, I think we have.

The reason it doesn't "look" like we have is liquidity. If we contrast today's sentiment to that of August 2000, when then Nasdaq bubble whooped out of existence, it isn't all that different. The only difference is the degree of maturity of the U.S. markets and ensuing liquidity. In short, no matter how bad the sentiment gets, there is still a continuous flow of bids out there. That's markedly dfferent from the dot com era when things imploded because noone was around to buy them.

Contrast this yet again to the newer "hot" markets like India and Russia and you get the familiar implosion effect: remove liquidity and the bids dissappear. This simple mechanism has everything to do with the amplitude of the resulting moves.

Bottom line: I don't think we'll witness a real "crash" in the U.S. indices. There are too many players on both sides of the fence and unless the whole world goes to war, they are likely to remain. That's why I still feel that treating emerging markets as an exaggeration of today's sentiment is proper; U.S. is really the same - we are just "saner" because we have more hands in play.

So, I think a point can be made that we did in fact "crash": the world did a real 1987 and the U.S. did a "mature" version of it.

Granted, in the longer term this will probably get worse before it gets better. But I think at this point you can bet on the "worse" part not being all that terrible.

Cheers,
/Dmitry

Concussion Morning

Feels like a big concussion grenade went off overnight as this morning has a lethargic, jittery, hung-over feeling.

Overseas markets opened way down with Gold and Oil contributing to the carnage. Since the open the markets have been trying to rally, but the action is this sort of unsure, shaky, "I know I should buy but I am too hurt and bone weary to do it".

All this with no real bad news out. Granted, we have all this inflation talk, the Fed, this and that, but in reality, what's actually new out there? We knew about inflation for some time now and we knew about Housing for just as long (BTW, whatever they say, but in NYC area where I live the prices aren't budging. Whle am a bear on real estate I don't see ANY technical (price) confirmation to the whole "bubble" hoopla.)

So, either the bad news is there and it's simply not in print, or what we see is what we get and there isn't anything else coming. If so, I doubt this is going to get a lot worse. Judging by the looks of the emerging markets (I am specifically referring to India, Russia, Turkey, Japan and Brazil) it already has for them. And if we can view these markets as exaggeration of the U.S. indices (after all, they are much less mature and liquid - thus the 40% moves) then the U.S. will bottom out along with them.

The synchronicity is there - the world "collapsed" on 5/11. Could it be that it "finds the bottom" on 6/13? Possibly. After all, we have the world discounted by roughly 30% in just one month. Yes, it's a crash, yes, it's brutal and yes, it is constructive.

I'll probably speak for most of us when I say that we're "too hurt and bone weary" to trade this potential bottom. But recognize that you'd sure hate to miss it. And as you know, when the going gets tough...

Best of luck, folks.

Cheers,
/Dmitry