Gold is soaring.  The one-month T-bill dips into negative territory.  Oil drops below $90.  The European markets close in a sea of red, the U.S. markets are selling off hard, and the VIX is jumping up.  Frankly, I don’t get it; at least I don’t get the ferocity of the change in the market psyche.  Sure, I understand that global economic indicators are soft and look to go softer, and the European sovereign debt issues are still front and center, but what gives?  Why the fire sale, the rush to the exits, the super-sonic flight to safe havens?

It’s not as if corporate earnings were horrible.  In fact, they were excellent.  More than 70% of all companies reporting met or exceeded guidance and corporate profits are at record highs.  Again, so what gives?  Maybe something is bubbling beneath the surface that is causing the now steady roiling in the markets.  

We seem to be entering a new stage of the currency wars where it’s not just the emerging markets that are responding to broad dollar weakness,” said Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore, who has written books on currency markets.  “Expect much more intervention in the future and further acrimony in terms of how the U.S. dollar is doing.

The eight-month truce in the currency war seems over.  In my mind, this creates uncertainty across the board.  Volatile fluctuations in global currencies are great for traders, but for economies, well, “that is a horse of a different color.”  At the very least, uncertainty in currency markets is another huge agent of fear. 

It seems the market now believes things are worse than thought about the global economy and the global debt issues.  Perhaps the U.S. political debate distracted the market from looking closely at the economic/fiscal issues around the world.  Perhaps, the pending unemployment report coming out tomorrow is driving the market toward a cliff.  Ya know, the falling knife thing.  I just don’t know specifically why the market is flipping out, but it is.  Once again, fear is present and a growing danger. 

I understand my credibility regarding handling fear is suspect after I let it penetrate my being during the debt-ceiling debate, but keep in mind, my worry stemmed from the ability of a few light-headed politicians to crash the global economy.  What is happening today in the markets is part of the natural market cycle.  The market is going down from fear, but is not 2008.  Liquidity, credit, financial health, and corporate earnings are dramatically different these days, so a collapse seems, well, unlikely.  So, if I am not credible on this, listen to someone else …

Don’t panic.  I know I say this a lot.  And I know “Don’t Panic” is a cliché.  If you can’t sleep, if you can’t settle down, if you’re desperate to chase metals higher and puke stocks lower, you should go take a walk or pick up your kid from camp.  Panicky markets make for good theater; sitting down to watch is a perfectly viable strategy today.

Trade in the day – Invest in your life …

Trader Ed