- Under normal conditions, the markets are impacted by any number of factors. One is the economic calendar. "Numbers" are released everyday - seriously, at least 3 every day for some indicator or another. Indicators are employment, retail sales etc. Whether or not the "number" beats "expectations" influences the market. After weeks of what we have been though, almost nothing is going to meet or beat "expectations". Generally, the stock, the sector or the market itself suffers when that happens.
- Under normal conditions, the markets respond to earnings releases - companies indicate what the earnings are in the last quarter. Again, same thing: Numbers vs expectations. After what we have been through, almost nothing is going to meet or beat "expectations". Generally, the stock, the sector or the market itself suffers when that happens.
- Under normal conditions, markets respond to policy statements, especially by the Chairman of the Federal Reserve. Usually, they ignore everyone else. These days, every time someone speaks they react to what is being said and they usually react negatively.
- We are still in a liquidity and credit crunch. Companies and investors just need to sell stock to raise cash. Funds have people asking back for their money. With so much volatility and incessant talk of recession, why not?
- Let's go back to my jungle explanation - there is massive "overgrowth" threatening the ecosystem. Those are the credit default swaps (CDS) that are choking the markets. They have not been handled. They are largely an invention of the US and the US Government is of the view that we have to wait for these $62 Trillion unregulated complex exotic financial instruments "work themselves out" (or something to that effect). Here's something that is also not a secret, turn on CNBC or Google it for yourself: CDS "working out themselves" means settlements of contracts that require significant amounts of cash in a short period of time. So according to the analysts, every time a "settlement wave" comes around, there is a selloff. People know that they are a large part of the problem and every time people are reminded that these CDS are still out there, the markets tank. The Chairman of the Fed Reserve, Ben Bernanke - you know, that one person the markets listen to no matter what - reminded us of that today
- More importantly, nothing has changed on the regulatory front. So people were exposed to the need for urgent regulatory reform, and yet nothing has been done. Lax and absent regulations still exist. People are still doing things that caused the mess in the first place. There is no ban on creating derivatives, or credit default swaps. Ratings agencies have not changed. This is not a secret, people know that. And then the SEC makes statements like the one they did today that they are aware that people are spreading false rumors about companies. Now, did I mention that some people make money by betting that a stock price will go down? Therefore,some people have a vested interest in the price going down. As far as I know, if it is proved that a stock price is actually driven down - by say false rumors - that is against the law. But by the time you get around to proving that and finding the culprits, the damage has already been done. Good companies are weakened, unable to attract investment, unable to function, and people lose their jobs as good companies try to save costs so that these good companies can meet or beat "expectations" in the next quarter. Again, people believe that this "betting against the stock price" is "vital to market functioning" and I am not commenting on that belief. I am saying though that right now markets are dysfunctional, and people are paid in these stocks that other people benefit from the price going down. So how is this helpful? In a crisis, the good of the society is being placed behind the inventions of finance? I fully support inventions of finance, but they have to have a real economy to invent on or about. They do not exist in abstraction. So at some point the market regulators have to get real about these inventions because frankly, the fear that people have that the stock market indices will go down to zero is completely counterproductive to the objective of restoration of confidence in the markets themselves.
- Global coordination thus far has focused on the banking system - to protect people's deposits and allow credit to flow to people and businesses. That was an indirect not direct assistance to the markets. It is only indirect because it puts the real economy back in focus. So for companies not publicly traded, and if you prefer to keep all your money in a bank and make no investments in the stock market for a while, you are relatively fine. When the banking system functions, the companies that are publicly traded who hire people have received tangible assistance to keep their doors open, and hopefully jobs as well. But they are still publicly traded so they need a functional - not dysfunctional - market. Can global coordination address the markets? Yes, that is what I am lobbying for everyday, but it is harder to achieve than just agreeing on banking. This is a real ideological divide. Nevertheless, there are immediate measures that can be taken but the US especially is completely resistant to those, and have already said so.
Think of it like this. What is the difference between a virus and a cold? You can treat a cold, but generally viruses run their course and we treat the symptoms for relief. Well, the markets MAY have a virus that does have to run its course. You know like the flu. But can we treat the symptoms for relief in the meantime? Yes! Do I think the markets have a virus that MUST run its course. Frankly, no. And that is the value of the power of global coordination. Governments can fix this problem. Let's hope the US is ready, because the rest of the world is ready because it is not about to have a virus that it cannot recover from.