Women and Children First
Stocks are falling. You know that. We’re going into a 3 day weekend. If you are very uncomfortable at the moment the feeling will most likely get worse between now and Tuesday.
I don’t believe in worst case scenarios. The sun will explode someday but it’s a lousy trade. That said, I do believe in market panic. I understand the animal spirits. I respect the power of the collective mood. There is nothing on earth that will dislocate a market quite like major currency problems. The basic assumption in any financial model is that valuation is based on a stable underlying currency. In the absence of said stability the numbers are gibberish.
There is no fundamental case to be made because who the hell knows what the Chinese are going to do if/when the Shanghai Comp burns like a wooden shed on Monday. Would a Chinese crash cause a recession here? I don’t know but the closer the $SSEC gets to zero the less I like our chances. Most stocks are worth more than zero but true value is not calculable. If you have no idea what a company will earn you can’t even create a PE ratio.
Under such conditions, doing nothing makes a ton of sense.
If the S&P500 drops to 1788 today we will have a genuine US Circuit Breaker. Presumably the Chinese would find this hysterical but, trust me, it won’t be funny here.
The last time the US markets triggered trading circuit breakers was 1998. The cause was “Impossible” currency fluctuations exacerbating the losing positions of a hyper-levered hedge fund called Long Term Capital Management. Most of you know the story. For those who don’t here’s a relatively lively academic overview.
On the topic of emotion being timeless, I’ve been reading up on the Panic of 1857 today. The trigger then was the end of artificially easy lending to fund the buildout of the the American rail infrastructure. Thank God nothing could happen like that today…
Here’s a link to a good summary of the 1857 Crash and a cartoon from the day. The man on the ground represents a banker who attempted to stop a market panic, as represented by the horse.
As I’ve said before, we’ve always known intervention doesn’t work. Governments simply can’t help themselves.
Why would I link you to these things when the stock market is obviously crashing? Because 20yrs of experience tells me the best way to burn off your fight or flight energy is to study, rather than trade. Analogies are not a gameplan. This time is ALWAYS different in critical ways. But humans never change.
Your trading opportunity will come from other people panicking. Your job is to be the smart money. Pick away at your favorite longs. Slowly. And do some reading. The crisis will still be here when you get back.
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