Stock markets across the planet plunged last night, and as I write this, the Dow is down another 5%. Smaller markets are really getting clobbered. The Russian stock market shut down twice today after dropping 15% in just one day.
Jim Cramer just issued a sell everything alert, people who don’t even own stocks are calling me in a panic asking what the Hell is going on, and the VIX, a volatility indicator that indicates stress in the markets, is off the charts. Ordinarily, things like this, by the seemingly perverse logic of Wall Street, would indicate things are nearing a bottom. Chicken Littles filling the streets yelling the End is Near can be a sign a reversal is near. (There is a logic to this, if everyone is bearish, then lots of money is on the sidelines waiting for the green light to signal.)
But… the economy is slowing down, home prices are probably still too high, billions in mortgages got turned into toxic glop and trillions in the derivatives thereof. Plus, the immediate problem is that credit markets have locked up. This has all manner of ugly ramifications. For example, California may need to get an emergency $7 billion short-term loan from the government because it can not sell bonds like it normally does.
California and other states and local governments across the nation are facing financial ruin because they can’t issue bonds to pay for essential services including roads and schools. Most U.S. states routinely depend on short-term financing to keep operating at the start of each fiscal year, until sales tax receipts and income tax revenues begin pouring in later in the year.
One piece of good news. Bank of America settled lawsuits against their now-subsidiary Countrywide, and agreed to change the terms so 400,000 homeowners facing foreclosure will be able to stay in their houses.
My guess: We need a good screaming omigod-the-world-is-ending panic, and then normalcy will slowly begin to return to the stock and credit markets and presumably to the world economy at large. But we aren’t there yet.