Marshall Auerback — Yes Virginia, We Can Have Another ‘Big Crash’

During the bubble era the wide gyrations in all of the affected markets could not be explained in terms of gyrations in the fundamentals. It all had to do with the psychology of manias augmented by moral hazard, panics, and crashes. In today’s moral hazard market the same prevails. Market prices are not about earnings or price earnings multiples, but are rather about the perception of risk and return. I say perception. Purely adaptive behavior calls for an extremely high perceived risk of loss and very low valuations. And this is the way individuals are behaving in this market place. Mega moral hazard results in market participants perceiving very little risk of loss because of prevailing insurance provided by the “policy puts”. And this is how professionals are behaving in today’s market. 

It is my assessment that market professionals want to believe in the existence and effectiveness of these policy puts and the Fed and Treasury will provide them with expectations management and policy actions that will keep those beliefs intact. Hence, the market has continued to rise. However, I believe it is also likely that these policy measures will not be as effective as most market participants now believe, as we learned in 2008. History does repeat itself and in compressed fashion.

Macrobits by Marshall Auerback
Yes Virginia, We Can Have Another ‘Big Crash’
Marshall Auerback