Capital Markets Psychology

In a number ways, the last few weeks in the markets have been a replay of May / Jun. 2010 : No
QE, shit canning of PIIGS sovereign debt, varied degrees of credit tightening in China and other
key emerging markets, plenty of "double dip" chatter. There have been some added antagonistic
elements this time out: Sheer operatic buffoonery in Washington re: the debt limit, and pursuit of
bigger debtor quarry in the EU, viz. Spain and Italy. And, of course, EU officialdom has seen as
behind the crurve during both episodes.

As with the spring of 2010, money flows into US Treasuries, and away from stocks, low quality
credits and commodities. The routine was exploded yesterday by a large sell off of stocks prompted,
I think, as much if not more by frustration and anger than sheer fear. Investors are steamed that there
has been a replay of the problems that nastily dogged the riskier markets 15 months ago. The
repeat of the same mistakes in short order is not professional.

When economic / financial problems re-occur with regularity, risk premiums on the more vulnerable
markets tend to rise, and not just for the short term. Thus, for example, we are witnessing a trend
of p/e multiple contraction for the US market as players discount a less stable global economic and
financial environment. Flip the coin and we see a dicey PM like silver trading about double
where it was in the spring of 2010 even though the global industrial economy is losing momentum.