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Hopefully, the history books will affix blame where it's due -- with Greenspan, his Fed, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Securities and Exchange Commission, and the folks who sit on congressional oversight committees, many of whom were in the pockets of Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs).
No LASIK surgery for hindsight
So some thoughts on the recent dramatic volatility: On the early-morning lows last Thursday, the CBOE Volatility Index ($VIX.X) registered a world-record reading of 80. The highest stock-market-oriented volatility that I personally have experienced was at the end of the first leg in the break of the Tokyo market in July 1990, when implied vols reached the 90s. (I had been short that market and was lucky enough to have closed out my positions that evening, which is why I remember it so vividly.)Volatility at that level, though relatively unprecedented, was at least a precursor to a bounce in that market. My experience has been that when something trades at an extreme, it can trade at an even more radical extreme, no problem -- the ultimate extreme being known only in hindsight.
That is what makes the stock market so tricky right now. Many folks would like to think that given the size of the wipeout we've seen, stocks must have discounted a lot of economic damage. I don't believe that, because for the longest time the stock market basically discounted nothing and especially went off a cliff here in the past couple of months. That said, I have closed out almost all of my shorts.
I don't believe the amount of damage that lies ahead has been fully discounted. However, when the stock market is stretched as far to the downside as it is now, and given all the firepower that central banks and governments keep throwing at the credit crisis, epic rallies can occur at any time, even though they don't mean much in the big picture.
At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.
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