“Rational markets do not behave like those we have witnessed during the past month.”
What is not rational is the enormous volume of liquidity created by the federal government. It is basically free money the gvt. gives away to large institutions. They can either loan it out to real people or speculate. They speculate. I think this is inflation in a narrow market. Lot’s of money chasing the same amount of equities.
At the same time, the amount of money in the real economy is crashing, nation-states are going to start defaulting, and in the real economy we are tiptoeing up to the cliff of deflation.
Program trading probably exacerbates the ups and downs. But the wild swings in the market seem to me like a rational response to an irrational set of facts brought about by our friends in the ruling class. I don’t know whether we end up in a deflationary spiral or an inflationary spiral. So how does one invest rationally? How does a market react rationally?
The dichotomy in this market is represented by the enormous amount of debt created by the government, in contrast to the reduced credit (and demand for credit) in the capital markets. The banks have all the “excess” and instead of loaning it out, they are investing it (short-term and via computerized trading programs). None of it seems healthy in the sense of traditional risk and reward calculus, because it is predicated on artificial values (the government creates unsecured debt and loans it at near zero interest rates to banks who pretend to have realistically-valued assets (CDO’s) to use it in leveraged security purchases and risk-swap agreements.