Best of the Net - Thursday October 9, 2008

I sit silenced by the ruthlessness of the market like most of you I'm sure. It's one thing to expect stock prices to fall, another to watch the utter destruction of our capital markets day after day with no sign of abating. Quite often I don't know whether to laugh or cry. And now that I'm firmly sitting in cash, having taken all profits possible from my short positions, I'm hardly consoled by the knowledge that I am a lucky unemotional spectator to this carnage.

As the last days have unfolded I can't seem to shake the notion that what we are witnessing is a once in a century event in slow motion. An inherent characteristic of most of these major panics of the past has been that the market systems malfunction due to the increasing volumes. During the Crash of '29 the ticker didn't finish printing trades for hours after the market had closed. People had very little idea where their stocks were trading throughout the day. The South Sea Crash and Tulip Bubble were rife with examples of mass confusion and misinformation. Additionally, most of these panics were accompanied by market closures. We have been seeing these elsewhere in the world, like Russia and Iceland, to absolute disastrous consequences, but not yet in Europe or North America. What this usually causes is a psychological fear of "not being able to get out." So instead of the enormous declines of 15-20% in a day, we're getting the Chinese Water Torture of 4-7% declines daily. For that we should be belatedly grateful.

The biggest problem I have with the way things are unfolding involve the perpetually terrible advice being trumpeted for the last year by our major media outlets. All along they have been telling the average person that they should be buying for the long-term, even as the economic data were pointing toward far more troubling times. It was entirely predictable. But I suppose that is the nature of the psychological beast we call our capital markets. Chris Puplava had a good chart showcasing one analysts terrible calls over the last year. It is truly amazing. See it here.

Another thought I can't seem to shake is that the Chinese have been sitting quite patiently with their massive reserves, and I think the possibility of them doing something crazy have heightened since I wrote about it in early July. I moved a portion of my cash position to the Chinese Renminbi currency ETF (CYB) in anticipation of a revaluation scheme of some sort.

But I'm still very careful about trying to pick up bargains here. It has become quite apparent that this is a beast that cares not about historical extremes. For days now, I've had some of the best technical traders in the world showing me examples of "something that has never happened before." Oversold extremes that have not happened since the statistics started being compiled (usually the early 60's). I've always held that saying, "it's different this time" is one of the most dangerous statements an investor can make. The probabilities of any event being completely different from a fair number of previous data inputs is indeed small.

But quite apparently, it's different this time.