10th October 2008 - the Black Friday of 2008

We have see large losses on world markets for the past two weeks. You may wonder why then did I pick today.

Well it's pretty simple actually, and has to do more with psychology than with real economy. This week served to confirm that feelings are now taking the larger part of healthy judgement.

Last week 29th Sept - 3rd Sept, was full of expectations. Monday the House of Representatives voted against the $700b bail out plan, hopes were still high thought after wednesday senate voted in favour of a slightly tweaked $700b rescue plan and finally friday the rescue bill did pass the House. It was thought that this should ease the crisis, some even hoped for a miracle. To most traders thought it was always clear the question is not UP or DOWN but the severety of the market DOWN.

The $700b rescue bill didn't do the trick ;-)! Monday 6th Sept was a complete let down, as we saw FTSE go down by nearly 8% and other world markets following this trend. In fact this was a clear sign that the $700b came too late. Whats more, on wednesday 8th Sept UK government anounced its rescue plan worth dozen billion pounds the markets still fell. Thursday saw coordinated efforts of 7 central banks lowering interest rates, to no avail. Well and today came the cherry of the week, Nikkei dropped nearly 10% eventhought the government anounced that they'll pump several billion dollars into its markets.

I could carry on mentioning a plethoria of rescue efforts by governments and regulators, let me just say that the UK markets have lost nearly 20% of its value this week, so have the US and Nikkei has lost twice as much as during the 1987 crisi. We are way past the fundamentals now, this is a full on crisis, comparable to 1987, 1970s, 1929.

We have reached a point where economics stops making sense and investor psychology takes over. Let me rephrase, economical incentives in form of regulation and rescue efforts should logically help, however panic has spread and nobody wants to own anything in the markets anymore, investor trust is gone!! This is just panic.....

Rebuilding trust takes time, which is the only thing we never have enough off.

another 100 year move, woohooo!

so here we go again a 9.4% drop on Nikkei this wednesday 8th Oct 2008, triggered by previous days drop of Dow by more than 5.1%, and now the European markets responded with multiple percent drops in the first trading hours :-)

I think it's obvious that we are now in a panic more than in just an economic crisis. All the drops on world markets propagate like a chain reaction with moves that are theoretically extremely unlikely (given standard capital market theory), and all this is still happening even with the various government rescue plans beeing anounced.

Today UK government unveiled their rescue plan, which compared to the US is tiny but clearly better. Even then the FTSE-100 fell with more than 90 constituents showing a drop in price!!

7.85% - the market's going down baby!

So what's up with that, a hundred year move is occuring a couple of times every two week these days. I mean given the current volatility, we can pretty much throw most of EMH out of the window. It ought to be understood that moves like this certainly violate any sense of Normal density distribution of returns.

Lets face it EMH is a crappy, oops, sorry lets use other words here... mhmm, incomplete model of financial markets. Maybe we should give a chance to FMH, AMH, or George Soros' Reflexivity Theory!!