Friday, November 09, 2007

Behind the Curtain III: The Destruction of Trust

Let's start by reprinting a chart of the "fear index" a.k.a. the VIX which I ran on Monday, Nov. 5.
(note the chart was dated 10/30/07, from the week before.) I wrote that the chart suggested a sharp market decline was highly probable. Voila, as the French say:

Please go to to see the charts.

Now let's look at a chart of VIX from 11/8/07, Thursday (intraday):

I received several emails from annoyed Bulls and other doubters after posting this chart, one demanding to know what my own market positions were, i.e. was I walking the walk or just talking the talk. It was a fair question, so I politely informed the affronted Bull that I had strike 54 puts on the QQQQ (Nasdaq 100) and strike 60 puts on APC (Anadarko Petroleum). The first position has done well and I suspect the second position will do well by the end of next week.

OK, I was lucky. But the VIX was shouting a warning to the Bulls. Now we see the 20-day moving average has crossed up through the 50-day moving average, a bullish cross. (Recall that the VIX rises as the markets declines, so a Bullish VIX means the stock market is diving/Bearish.) Also note the positive MACD and strong RSI (relative strength). Anyone thinking the Bulls are going to rise up and re-take the market by storm would be wise to consider the full meaning of this chart.

Which is what? (Drum roll please): the destruction of trust.

Fed Chairman Ben Bernanke testified to Congress yesterday (Thursday 11/8/07) that the U.S. economy was "resilient" and he wasn't worried about the Chinese central bank selling dollars. The markets tried to rally on his usual threadbare lies and then tanked.

Mr. Bernanke, you have zero credibiity. You spout absurd reassurances based on rigged statistical lies, and the world no longer believes anything you say. You have sold your soul to Wall Street for a pittance and thrown away whatever credibility you once had.

And Ben isn't the only one who has thrown their credibility to the winds in an endless spew of outlandish, pathetically brazen lies; all of Wall Street has mouthed the same empty slogans of "containment" and "resilience" and now nobody trusts them, either.

Every time you turn around, another "trusted big name on Wall Street" has reluctantly copped to another $3 billion in losses--after reassuring us via the lapdogs in the financial media that they were not reporting any write-downs.

Or reporting write-downs were now somewhere between $8 billion and $11 billion. You mean you don't know? Now we know that "between $8 and $11 billion" really means between $20 and $50 billion, depending on just how honest they're forced to be.

But the Lying Bulls are still hoping to pull a fast one in order to save their billion-dollar bonuses this year. Frequent contributor Zeus Y. sent in this note quoting Eric Janzen over at the well-regarded iTulip website: (subscription required for some content)

Thought you'd like this blurb to see how banks and fund managers are trying to eke out a few more months of delusion, in particular: "Ronald C. Ward, President of fund of hedge funds FutureSelect Porfolio Management, for example, told us in a recent interview that fund managers were going to try to keep stock funds up for end of year bonuses, if possible. With more than 50% of equity market capital at their disposal, success was within reach so the effort was at least worth a try. (emphasis added, CHS)

Everyone else in the business we talked to was similarly skeptical that a narrow run in the stocks of exporting companies could sustain the market. So we called in our wayward readers to make sure they had not lost sight of the unreality around them. Today, with the DOW plunging 360 points, they don't need us to remind them.

So what rushes into the vacuum left as trust in our financial leaders and institutions evaporates under the hot relentless wind of lies? Fear.

That's what the VIX is reflecting: the fear of trust demolished. When you have lost all trust in those entrusted with guiding the nation's economy and currency, then fear is natural. When the institutions you have entrusted your money to are all lying, loudly, aggressively, defensively, then eventually you realise you have no choice but to sell: sell your stocks, sell your bonds, sell your emerging markets funds, sell it all because you can no longer trust those who have thrown their credibility away in a blinding blizzard of carefully engineered obfuscation and lies.

Now who do you trust? The foaming-at-the-mouth Bulls on financial television? How much will you have to lose before you turn the shills off? Maybe there's nobody left to trust except a very few on the margins of the media, and those analysts who write blogs.

I promise you the real firestorm has not yet ignited. I will cover this in more depth next week, but here is the reality Mr. Bernanke, Wall Street and the financial media are too terrified to ever mention:

All the garbage debt which investment banks are writing off is merely the tip of an incredibly massive iceberg. The bulk of that garbage debt is held by pension funds, insurance companies and other institutions. These institutional buyers are generally prohibited from owning "risky assets," i.e. any debt instruments rated less than AA.

So what happens when the rating agencies finally face reality and lower the rating on all that AA debt to BB or lower? The institutions are required by their own bylaws to sell the garbage. And what happens when hundreds of billions of dollars in downgraded debt is thrown onto a market gripped by fear of risk? The already-low market price of these "assets" falls--and keeps falling until many are written off as entirely worthless.

Don't think it will happen? Sure the market will recover because the fund managers are crying for their bonuses? Keep watching, for it's beyond their control now; the fear and distrust can no longer be papered over with more lies and prevarications.

Readers Journal updated 11/09/07 More new entries-- Please see top-right sidebar for this month's essays.

Thank you, U.K.C., ($50) for your continued support and encouragement both financially and in the realm of powerful ideas. I am most appreciative of your donation to this humble site, and greatly honored by your readership. All contributors are listed below in acknowledgement of my gratitude.

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