08.09.11 1:53 AM ET
Why Markets Are Melting
Welcome to the crash of 2011. With stunning speed, global markets have sold off to a degree not seen since the worst days of late 2008 and early 2009. In fact, only three times in the past 40 years have stocks sold this hard this quickly, with a 16 percent decline in the S&P 500 in a 10-day period surpassed only by drops in the Octobers of 1987 and 2008.
No one can say precisely when or why this will end. Its triggers we know: a flawed debt deal in the United States, renewed sclerosis in the European Union about peripheral debt issues in Greece and Italy, a downgrade by Standard & Poor’s of U.S. sovereign debt (oh, the irony of S&P downgrading debt leading to a precipitous decline in the S&P index), and then a wave of global selling. No market has been immune; not one.
Since global markets bottomed in March 2009, there has been an uneasy calm, the capitalistic version of the “Phony War” period between the fall of Poland to Germany in September 1939 and the fall of France in May 1940. None of the reforms passed in the wake of the financial crisis create any breakers against synchronous global financial panic. Yes, there is less leverage and more capital in financial institutions, which is a vital difference between now and then and augurs against a repeat of what happened two years ago, but there are no circuit breakers that prevent the rolling flash-crash of the past week.
These moments create ripples of fear that build like tsunami waves until they crash with destructive force against the shoals of investor confidence, institutional balance sheets, and collective investing psyche. And more than ever, they race around the world unimpeded by national boundaries and uncontainable by central banks. This is a fact of our global system, the downside of the upside of ample liquidity and the ease of getting it from one place to another. And no matter how much we’ve said this over the past three years, when it happens, it is visceral, breathtaking, alarming, and in its own way awe-inspiring.
The trader in me spent considerable time in the past few days preserving what capital I could while trying to stay positioned for the inevitable snap back that will occur. But at times, I also watched in fascination as stock after stock sold off without any consideration of the intrinsic strength of the underlying businesses, even discounting for a possible global recession. Even though such a recession seems highly unlikely, stocks sold off well beyond whatever consequences such a global contraction might have. At moments, it was nothing so much as a screen-shot from The Matrix, with numbers flowing in endlessly alluring and mystical patterns replacing normal language and reframing the world.
But it’s imperative not to get utterly sucked into that alternate reality of high-frequency machines driving prices down everywhere, with a logic strictly of flow and numbers. The internal language and logic of the markets is related to what is going on in the real world, but right now only tangentially. Stocks aren’t selling because of the Washington debt deal or now even because of yields in Italy. They are selling because they are selling. Apple this week is not a company with 12 percent less business than last week; Caterpillar is not about to sell 30 percent fewer earthmovers in China or Brazil. China is not about to purchase 25 percent less iron ore.
That, however, is what the markets are saying about those companies, which is a sign that the markets actually aren’t saying anything about those companies, or about the U.S. debt burden or even problems in Europe. It is about the way that external triggers can set off market chain reactions that happen too quickly to react.
The flip side, however, is that as quickly as the tide crested it can recede. Or rather, as quickly as things fell they can rise. That is why even short-sellers who bet against markets are anxious: few can afford to be on the wrong side when it hits bottom—and that in turn only adds to the frenzy of buying and selling.
The financial world can do great harm and much good, but it is one part of a global system. It is currently in panic and selling mode; the real risk is that at some undefined point, it generates a freeze in real-world activity. Absent a breakdown in the actual daily money market, which we saw in the fall of 2008 and into 2009, that is not looming. You’d be a fool to call a bottom here, but one of the only good clichés on Wall Street is that no one rings a bell at the bottom and then shouts, “Buy!”
The crash of 2011 is already a bad one by any historical standard, not Great Depression bad, not crash of October 1987 bad, and not the continual collapse of 2008–09 bad, but bad enough. In 1987, the market rebounded very quickly; in March 2009 it did as well. If we are October 1987, it’s time to buy; if it is December 2008, watch out. We will only know the answer to this in retrospect, but this feels more like a crash than a new trend, and like any flash fire, these burn quickly, intensely, and then they stop. You don’t want to be in these markets when this is happening, but you also don’t want to be out of these markets when they reverse.