Blame the computers? Bah humbug.

Did the computers drive the Dow down 25% in a week in May 1940 (no, there was no major war news that would have justified such a move):

TD Ameritrade

Here’s the Dow for the duration of the last depression. Quite a few crashes in there:

TD Ameritrade

The fact is, markets just fall out of bed sometimes. It’s normal, and they don’t need the kind of reasons you can read about in the paper. Greece had nothing to do with it.

A move like this off a top does not mark the end. If we had plunged hard and reversed like this after we were already reading oversold on sentiment and momentum gauges, it could mark a bottom, but not right off the top — that is what should scare people today. This was not like Black Monday ’87 — it’s more like the Black Thursdays of ’29 and ’08 (huge intraday crashes with recoveries, followed the next week by the real crashes), or the Friday before the ’87 crash (down 5%). It’s likely a kickoff to more downside. New highs are possible, but looking less and less likely, and we doomsayers might be right after all these months…

You can’t predict a crash, but you can tell probabilities, and the probability of a decline was high as of last week. We had an extremely, extremely depressed put:call ratio, momentum was rolling over, mutual funds were all-in, and just about every measure of sentiment showed that complacency and bullishness were off the charts.

All this in the face of a depression. Yes, we are still in a depression — that’s what steady 17% unemployment is. Obama and friends conjured up some positive GDP by abusing the Treasury market’s generosity, and that spending is counted as “product,” but tax revenue, real estate prices, rental property vacancies, and unemployment tell the real story: this is a fragile environment. Dow 1500 is still on the table.

And how about gold? I gave up shorting it and suspected a rally after it failed to follow through on that drop from $1200 and sentiment got really bleak. Maybe real money will win sooner than I thought, or maybe this is a 2008 replay and gold will turn once the waterfall gets underway. Anyway, it gives me some hope that the companies in my mining stock database might not all go broke.

Dollar on the brain

This is from Google Trends, which tracks the popularity of search terms:

–

–

The question is, did something change in 2008, or was that just a blip? It astounds me how many stock market bears (and gold bulls) ignore what has become an extremely tight inverse relationship:

The Dow:Gold ratio broke 9 today.

It just broke 10 yesterday. By the end of this bear market, one ounce of gold will buy the Dow, just as it did in 1932 and 1980. In the short-lived Panic of ’07, it only dropped to 2 ounces.

Gold is money, and in deflation, that’s what you want. I still think gold should fall to $600 or lower after this panic buying subsides and people need to sell it just to pay their bills and debts. Also, the reality of deflation hasn’t begun to set in yet — people are still looking in the rear-view mirror at inflation. A lot of gold bugs are going to bug out when their hyperinflation scenario doesn’t pan out soon. Their timing will be awful, because we will eventually (I’m talking years) get hard-core inflation after the new New Deal kicks in.

Black Friday?

The wave of panic went around the world last night. Will it wash over the US again?
Charts below from Bloomberg:

Japan:

 

 

 

 

 

 

–

Europe (markets not closed yet):

 

 

 

 

 

 

–

Western Hemisphere Futures:

 

 

 

 

 

 

What does a crash look like?

Even for a guy who went into 2008 with half his net worth in put options, this is stunning to watch unfold.

Here are a series of 3-month charts that show the shift in mood from August’s complacency and hope to today’s moderate terror:

–

Worry, worry, worry…PANIC.

The Dow. Look at the bottom drop out today:

Bigcharts.com

–

Insurance gets expensive after the storm rolls in.

CBOE Volatility Index (only ’87 was higher):

Yahoo! Finance. Click image for larger view.

—

Getting ahead of the curve.

30-year Treasuries broke solidly through 4%:

Yahoo! Finance. Click image for larger view.

–

Who says cash is trash?

90-day T-bills. They would have stayed lower if Paulson hadn’t bailed out MM funds:

Yahoo! Finance. Click image for larger view.

–

No stock is immune:

Wal-Mart:

Bigcharts.com

Toyota:

Bigcharts.com

–

After the strength and breadth of what we saw today, I don’t think even this stage of the panic is over. Today I sold off most of my near-term puts, since I don’t like to press my luck, but I’m still holding a boatload of 2010s.

This is just the beginning of the middle. You’ll know we’re near the end, years from now, when stocks drop 5% in a day and it doesn’t even make headlines since nobody is in the market anymore.

——–

Today was an historic day, but nothing out of character for the bursting of an historic credit bubble. It was like all the other down days, only more so. There will be more to say, but I’ve been up since 4AM and need some sleep.

T-bill update: 90 day at 0.16%

So this is what an old fashioned panic feels like. I think this is the beginning of the plunge that will take us to near 9000 on the Dow within a few weeks. But that won’t be the end. I’ll consider the possibility once we’re under 4000 or 2 ounces of gold per Dow unit, at least 2 years from now. Anyone who is unsure about their stock holdings should get out immediately. I don’t care how big and “defensive” a stock is, all equities are going down.

Click for sharper view. Source: Bloomberg

The Fed can’t hold at 2% if T-bills stay this low for long. Watch for a surprise cut.