how much fear do you think we had during March 2000 and the months following.
to say that a measure of fear means the contrary in price movement is not accurate. Price action becomes recursive, or trendy when enough models break.
utlimately it comes down to orderflow into equities. Some things that favor orderflow in equities.
price appreciation, results in further price appreciation.
price depreciation, results in further price depreciation.
so if you see all these troubles looming, are you going to funnel money in low speculative instruments with preservation of cash of the primary importance or will you step infront of price depreciation.
now if margin calls and redemptions slow, then sure the impetus to sell will be less, but this is dictated by troubles in other markets. So ultimately the stock markets ability to appreciate or depreciate is linked to troubles in the credit markets.
Now whats the primary reason for trouble in credit markets? Too many bad loans to people who will never be able to pay it back. So the people are walking away from the loans. This is massive destruction of wealth, much more so then tech bubble imploding. This loss of wealth drives up costs of financing for anything that needs to be done in the marketplace. This puts brakes on the economy, and its doing it globally. Not just isolated to the USA. So will banks be more conservative for the next few months or years? sure.
So everyone will be hoarding cash that they have. And wont part with it, unless the rewards unbelieveably good. The FED made a mistake by not being more aggressive in their statement. Loss of wealth in one asset class could have been buffered by inflating wealth in another asset class. Paulson intimated that thats what he was looking at. But Bernanke is asleep at the wheel. To reverse the damage that has occured, massive infusions of wealth have to occur, and the ECB realized this sooner then anyone.
So project out what the world will be like for the next few years. There will be hoarding of wealth by financial institutions. Deals wont be able to get done. The equity market will be entralled in a mood of pessimism, if its not inflated soon.
Bernanke should undergoe a psych evaluation, his thesis in grad school was on the Great Depression. Maybe he wants it to happen subsconciously during his reign.
