Contagion is a good word to describe current events. Dominoes keep falling in the great contraction of global liquidity. Investors/traders are bailing out of positions because they are losing money in one market or another, and are trying to curb losses / reduce risk. Banks are severely reducing their lending to funds and forcing funds to mark-to-market collateral. The most recent victim is the global carry trade (mentioned yesterday). Today we see the Yen up significantly while the AUD and NZD are down 3-4 cents in ONE DAY. Emerging markets are starting to feel heat; yields on gov. bonds such as Hungary and Turkey are rising.
There seems to be no turning back now. This will get worse. Selling is begetting more selling. The fundamental problem is that there is such a large amount of leverage in the financial system at present. Everyone is playing with borrowed money. The most likely scenario is that this will continue for a while, then the central banks will be forced to step in. The central banks do not want to bail everyone out -- they are concerned about moral hazard, certainly. But they also do not want this to spread to the real economy. Most importantly, perhaps, they do not want this to cause a collapse of the banking system. Bernanke is, after all, the expert on the Great Depression.
I am seriously considering adding to the short position sometime today.
MARKET POSITION: SHORT (2 units)
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