Trader’s Narrative

The following charts are from Jason Goepfert, of SentimenTrader.com, showing his proprietary indicator called the “Panic Button”.

This indicator measures stresses in the credit market and is expressed as standard deviations from the norm. So a 2.0 means that the aggregate measures are 2 standard deviations from their usual or normal place. Yesterday it reached 9.5 (intraday) but has since come down to “only” 4.

Notice how it dwarfs all other major crisis in recent history! This is similar to the long term chart of the 3 month Treasury Bill rate I featured yesterday.

Here is the same chart, zoomed in to the latest few years:

It is not only awe inspiring, I’m left wondering what in the world it all means. Have we left reality and entered a bizarro alternate one? of what use is history and precedents when they are so out of proportion with what is happening right now?

Lynching Short Sellers
Then there is the rumor of the SEC moving to ban all short selling or as the FSA across the puddle, short selling related of financial stocks. Need I or anyone else, explain that this is completely moronic? Short sellers, far from being the culprits in this mess, are actually necessary for the proper functioning of price discovery. Furthermore, the effect of short sellers is to actually slow down a crash.

If that sounds counter intuitive to you, consider that every single share sold short is in effect, a future buy order. So as prices come down, it is short sellers who buy, in selfish interest to lock in profits - thereby providing some sort of friction to stall the downside momentum. Simple stuff. Economics/Trading 101.

But the current US administration is so dumb that they couldn’t empty a bucket of water if the instructions were glued to its bottom. While they attempt to forestall the inevitable, hoping against hope to buy time before a collapse before November, they are only damaging the economy of the US and the whole world by extension even further.

Get A Clue
By the way, if you aren’t yet aware of news.tradersnarrative.com you have no idea what you are missing! The rumour of the SEC’s move was on there hours ago and many other must read links get posted regularly. If you have an interesting link that you’d like to share or comment on an existing one, you can now do so.

Paul Krugman writes in today’s New York Times:

How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.

Credit — lending between market players — is to the financial markets what motor oil is to car engines. The ability to raise cash on short notice, which is what people mean when they talk about “liquidity,” is an essential lubricant for the markets, and for the economy as a whole.

But liquidity has been drying up. Some credit markets have effectively closed up shop. Interest rates in other markets — like the London market, in which banks lend to each other — have risen even as interest rates on U.S. government debt, which is still considered safe, have plunged.

We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential subprime crisis.

I agree. Although it doesn’t absolve the millions of Americans who got mortgages which they did not understand for houses which they could not afford, using a system of valuation rigged to artificially pump up prices… the bulk of the blame has to be liberally heaped on the previous Fed chairman.

He poo-poo’ed repeated concerns about derivatives and who refused to acknowledge a full-blown real estate bubble even as it inflated under his nose.

Of course, now he not only agrees that there is and was a bubble, he now even calls it by that name and goes as far as calling it a “global housing bubble”. But just to be clear, it isn’t his fault in any way whatsoever.

Retirement does wonders for the brain.