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Yesterday's Flip Flop

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The Fed's efforts to stave off small forest fires from happening has only guaranteed that we will have a gigantic one.

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Yesterday, Morgan Stanley (MS) gained on the fact that its write-off wasn't as bad as folks thought. Other brokers were mixed. Ditto the housing-ATM food chain. (I still find it odd that people refuse to see the writing on the wall, which is that we're having an enormous credit crisis at the same time we're having a currency crisis, but I guess muscle memory dies hard.) All in all, it was quite a scramble, with another crosscurrent supplied by Bernanke, who demonstrated a firm grasp of the obvious by telling Congress that the FOMC expects growth to slow noticeably.

The S&P actually managed to stay not too far from unchanged until just before midday, when the onset of a slide saw it down about 2%. At the same time, the Nasdaq was down about 3%. Of course, a bounce ensued. With about 30 minutes to go, the S&P had cut its losses to only about half a percent, though the Nasdaq was still down 2%.

I'm not exactly sure what caused the reversal -- other than that the S&P had recently hit the lows from last August and, more importantly, that Citigroup (C) turned around to down just 2% (after having been down 7% or 8%). That inspired buying in lots of financials, as well as mundane stocks generically.

And, just because other stocks were bouncing, tech stocks bounced as well -- with a handful of them actually up on the day, as though their companies operate in some different universe. Most of the horseflies cut their losses pretty dramatically after having been pummeled earlier. Lots of stocks are prone to random short-covering at any time, and today there was a fair bit of squirrelly action in some smaller names with big positions. All in all, it was a pretty ugly day, though we closed in a fashion nowhere near as ugly as looked to be the case at midday. In my opinion, there's unfinished business to the downside.

The late-day rally notwithstanding, lots of tech stocks were hit hard, with even more damage sustained by the momentum horseflies that have carried the tape. The reason I think this is significant is because it's an indication of (a) dots being connected, and (b) speculation being vanquished. It was the last piece of the puzzle that I was looking for as signaling a dislocation or crash.

I know I've talked about a dislocation fairly often and it hasn't happened. Such events have an extremely low probability of occurring. But for folks to think it's not possible would be wrong. The stage has been set, such that the low probability is far, far higher than "normal."

That is thanks to the reckless policies pursued by the Greenspan Fed for the last decade and a half, which have enabled the risks to pile up while rewarding folks for ignoring them. The Fed's efforts to stave off small forest fires from happening has only guaranteed that we will have a gigantic one.

So, we are at a moment in time where a crash is far more likely to happen than at any time before. Does this mean it will happen? Not necessarily. But for folks to think it's not possible would be wrong. It feels to me like that could be right around the corner.

I am not rooting for this, but it seems to be inevitable. What I am rooting for is the return of sanity, which is something that only a large wipeout might bring about. We have to stop the cycle of bailing out risk-takers, and that is where we are now. At some point, "too big to fail" will become "too big to bail out." And it feels like we may be at that point.
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