Danger: The wipeout is still ahead

By Bill Fleckenstein

During the seven years that I have been writing this column, I've endeavored to keep the staleness factor at bay. (As readers may know, the Contrarian Chronicles is a compilation of the daily Market Rap carried on my Web site, and it is filed days in advance of publication.)

But because of the recent extraordinary volatility in the markets, and the near-daily momentous action on the part of various government agencies, I feel compelled to break with tradition and share my Wednesday, Oct. 8 daily column with MSN readers here. Hopefully, this real-time installment will prove useful. The Contrarian will be back to its regular format on Oct. 20:

Another drop, but not the drop

The market's recent, wild action has been so momentous that it's difficult to do justice to all the developments. I'd like to tackle the task by covering two topics.

• First: market action, which is usually noise, not news. However, I believe that the trading activity of Wednesday, Oct. 8, as well as the previous few days, in various markets was a real source of information.

• Second: gold versus paper.

Overnight Tuesday, Asian markets were hammered for about 8%; Russia collapsed again, to the tune of 14% (with that market halted yet again); and Europe was in a state of collapse as well, lower by 7% to 8%, with the S&P futures sinking to the tune of about 3% -- when word of the coordinated interest-rate cuts hit the newswires. In no time, the S&P futures were higher by 3%. But an hour later, they were back on their lows again. Thus, it looked to me as though the culminating move of this slow-motion crash that we've been witnessing might actually occur -- in the form of a 10% or more down day in America.

Picture of a not-ready-to-capitulate market

However, as soon as the market opened Wednesday, stocks were bought aggressively, such that the S&P futures were quickly 2% higher, with the rally led by tech stocks. I don't know if this was short-covering or fear of missing the rally. At first I thought it might be the former. But then for a couple of hours, even as the S&P began to leak (back to down 1% on the day), tech was still firm. It looked to me that folks were placing their bets on catching the next up leg. (While that was going on, European stock markets slid back almost to their lows, with indexes down 6% to 7% apiece.)

Stock market wipeouts, such as the one now under way, do not end in the fashion I just described. They end in white-knuckle fear for everybody -- i.e., people fearing for their jobs, their net worth, their money, etc. So I do not believe that Wednesday was "it" for the downside. The major fear seemed to be of missing the upside, not the fear of being decimated (and we still haven't seen epic volume).

• Video: Big Dow drop? Don't panic

In other markets, that was not the case. The moves in currency looked like complete panic. Canada, Australia and Mexico (to pick three countries that people know of) saw their currencies hammered. The Australian dollar was down about 4%. The Mexican peso dropped 9% at one point and traded at an all-time low. Meanwhile, the yen was screaming to the upside, though the euro was sort of a nonevent.

Continued: Treasury market battered

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