Crash after Columbus Day?

I'm preparing for the financial (bond, stock, and commodities) markets to begin crashing on Tuesday, the day after Columbus Day. Why do I think this? Because as oversold as this market is, it's violated every oversold indicator to become even more oversold. Everything in the business world is seizing up due to the lock on credit. I tried rolling over some retirement money I have in a private placement, but the company's lender put a clamp on the preferred stock as collateral for the company to continue borrowing. Typically, there is a rally that begins prior to each presidential election.

How ironic it would be to doing our own "price discovery" the day after Columbus/Discoverer's Day. For a little less than the past two decades, the VIX volatility indicator has indicated a turning point upward whenever it reached the 55-60 range. It's been well into the 50 range for the past week and a half, 60+ for the past few days, and 70+ for the past couple of days. It didn't exist during the 1987 market crash but I've heard it would have been somewhere in the 150-170 range.

I also can't see how we've reached what's called "capitulation," where everyone throws in the towel in defeat. We need to close at or near the lows on one day, preferably with the so called "circuit breakers" being hit. I believe the current circuit breaker on the DJIA is a 1100 point drop in the market by 2:30p EST. We need to hit that circuit breaker, then close for the day on or near the lows. Then the crash needs to be on the first 2-3 pages of every news paper. The following day, the markets will trade to their lows for the first part of the day, and that's when the buying may (or may not) safely occur. It's possible we may even hit the 2,200 point drop circuit breaker. We haven't gotten to that point yet. There's fear in the market, but not the type of fear that is indicative of a crash. Look at various stock charts. Yes, stocks are down, but aside from financial- and commodity-related companies, there aren't many company's whose stock charts show their stock dropping off a cliff.

The alternative to a crash is even worse...it's that Chinese water torture that just drags lower and lower and lower. There will be a series of one- or two-day rallies to suck in bottom callers (like me) until those buyers are no longer willing to buy. I'm not sure how likely this is. It wouldn't surprise me if this went on for a while. What sticks in my mind is the Long Term Capital Management (LTCM) blow-up in 1998. LTCM was a hedge fund employing various nobel prize mathematicians that specialized in taking advantage of small imbalances in the market. They bet, and made tons of money, initially, that those imbalances would correct themselves. Eventually, they were too leveraged and couldn't outlast the Russian currency crisis that went on for over a month, I think. Throughout, LTCM kept saying that things would get better because the stock market acts like a bell curve and it's impossible to many high standard deviation events. Well, the outcome of that situation was that it became clear that the stock market does resemble a bell curve, but that "tails are fat" -- meaning that it's rare for high standard deviation events (like we probably have now) to occur, but when they do occur, there's a whole bunch of them that occur together. So we will probably have a big collapse of some sort to have the fat tail on the negative side, then we will have enormous rallies afterward for the fat tail on the positive side.

It's become clear to me that this whole situation is due to massive credit expansion, but that it's not the credit expansion itself that has manifested itself into this current problem. While credit expansion (Greenspan Fed and other central banks) may have been the root cause, the current problem as to why the credit markets are locked is due to counterparty risk. I explained the situation to a co-worker by comparing it to HIV. I said, imagine that there's a whole slew of promiscuous people going crazy boinking each other. One, then another, then another comes down with HIV. The government can hand out condoms and encourage that risky behavior all it wants, but the remaining participants decide to take a break because they've had their fill of excess behavior and will remain on the sidelines until they know the coast is clear.

So essentially, we are reaching the point where it's survival of the fittest. Businesses want to see who's going to survive and who's on their deathbed, letting everything unravel. The Fed has decided to lend to (major) private businesses to allow them to cover their day-to-day expenses like payroll, etc. The pendulum has now swung in the opposite direction, though, and no matter what the Fed does, I don't think businesses will lend until counterparty risk is minimized -- probably through trickle down effect in the economy. What allowed the counterparty risk to exist to this extreme to this point was the credit default swap (loan insurance) market. But that market is dried up. That's a $60-70 trillion market that NOBODY is big enough to hold up.

I can see the Fed coming out with initiative after initiative, funding through Treasury sales and creating massive inflation. That will in turn cause the foreign holders of Treasury securities -- which is somewhere in the 30-45% range -- to begin repatriating their moneys. I would think that the BRIC countries (Brazil, Russia, India, and China), along with Japan, are the largest holders of US Treasuries. The repatriation has to result in China unpegging the renminbi from the US dollar, at which point the renminbi will skyrocket. Russia and India and the OPEC Gulf States will probably shift into petrodollars. Across the board, there will be a shift into gold.