Some thoughts and today's rapid plunge in the Dow and S&P.
1) This latest "bull market," which has gone on more than year, has certainly been more significant and lasting than a "dead cat bounce"; however, its inherent phoniness and lack of any real foundation has always been manifest. On March 16, 2009, "mark to market" accounting rules were suspended for banking institutions, allowing them to mark their assets to fantasy, myth, and wishful thinking. Much like Enron was able to dream up profits untold -- and unreal -- though its now-legendary accounting, since March, banks have been able to value countless depreciating, if not worthless, assets at the prices they'd like to see, and not likely the ones they'd ever get. Financials led the way down this afternoon, and despite the rebound, it remains only a matter of time before "mark to myth" is shattered by reality.
2) The Dow and S&P had been trending down for a couple of days, but between the hours of 2 and 2:30 PM, the major indices went into a classically shaped parabolic death spiral -- only to rebound sharply just before 3 PM. This is kinda fishy... Perhaps too much is made of the President's Working Group in Financial Markets -- aka "The Plunge Protection Team" -- formed by President Reagan after the '87 debacle; however, knowing what we know of the government's meddling in other markets and of people like Larry Summers's love on "behavioral economics" -- if there's "confidence," all will be well! -- one shouldn't discount the idea that after the dive began, some combination of the Fed and Treasury started rapidly buying up Dow and S&P futures in order to bolster the market. Yes, it's a conspiracy, and it's also quite plausible.
3) Much like every losing general is always re-fighting the last war, most people assume that the next crisis will be just like the last one. It's certainly possible that we could have a repeat of the '08 credit crunch, but there are already signs pointing to something much different. In the fall of 2008, people dumped stocks and commodities and piled into treasuries as a "safe haven" -- miraculously sending the yield on T-bills negative for a brief point in late November. Gold, too, was sold off, dropping from above $900 to the $750 range (and it had been over $1000 only months before.) In today's mini-credit crunch, Treasuries were again popular -- but so was gold, which rocketed upward as a mirror reflection of the Dow. Could it be that we've witnessed the beginning of a major decoupling? Might gold take over the dollar's safe-haven role? Might gold begin moving inversely with equities? Too early to tell.
4) (This last observation is complicated and is probably worth a full article.) Stepping back a bit, one can conclude that it's actually in the government's best interest for a major downturn to occur -- so long as it's accompanied by a mass flight into Treasuries. It's usually good for a government if its people are content and untroubled, and in modern times, this is associated with a buoyant stock market; however, a government's first priority is to get itself funded. If Bernanke's money printing sends price inflation out of control and bond yields go through the roof, then the U.S. become Greece -- and its ability to fund its entitlement programs, wars, and stimulus packages is thrown into jeopardy. If there's a crisis -- or rather, the right kind of crisis -- and everyone decides they want to own government debt, then Washington is actually strengthened. Don't think that this isn't in the back of some people's minds -- or that they're not considering the need to roll over billions in debt in the near future.