Fear and Panic in Wall Street and Washington

Posted: Jul 30, 2011 12:01 AM

Folks, these are the times that try the souls of investors and traders. The nonsense taking place in Washington right now—playing with our credit rating at the 11th hour—is absolutely shameful.

I’m on the side of the aisle that wants to see spending cuts without raising taxes, but right now I’m speaking as an American and as a father of two. If both the Republicans and the Democrats don’t do something—if our country ends up being delinquent on debt and our credit rating goes down—every single person living in the United States will be affected.

Looking at the markets, we’ve seen a 3%-5% break over the last couple of weeks. Markets don’t lie. They’re unemotional, and they’re a wonderful discounting mechanism.

Right now, the market is being forced to try to discount our inept leadership in Washington. It’s never really had to do that before.

The longer this debt-ceiling debate goes on, the more buyers seem to go on strike. That’s why this break has been light in volume—we’re simply not seeing participation. The end-of-day selling yesterday was more indicative of defensive posturing than anything else. That, I think, is an important detail.

Back in 2008, we saw pure liquidation. Everyone who had any exposure anywhere was selling in order to raise whatever capital they could. Here in July 2011, we’ve yet to see a full-fledged panic; instead, portfolio managers are looking for insurance.

They don’t want to collect on those downside puts on the S&P, but they want to be prepared. They know that markets go down faster than they go up, and if we don’t get some resolution in this debt-ceiling debate before Tuesday, we’re going to see another similar break almost instantly.

I aim to be a good steward of information, folks, and right now, this market is worrying me. It’s trading scared, which means fear and panic have set in. That’s one of the reasons gold is flying—that’s a fear trade, pure and simple. These jokers in Washington have no idea what they’re dealing with here, and the market is reflecting that.

The bigger story of corporate earnings and global growth is by no means over, but right now, uncertainty remains the immediate concern. To paraphrase Howard Marella, president of Index Futures Group, who was my guest on the show today, The smart trade is no trade. The circus is in town—it might be best to just sit down and watch.

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