Trader's Fog

[fx_tactician]

If you are not familiar with a “Trader’s Fog”, it is eerily similar to the fog of war. It occurs whenever there are strong levels of ambiguity in situational awareness that is experienced by all participants in the market.

Currently, the Trader’s Fog is thick and there are very few indications that it will be lifting at any time in the near future. The major causes for this recent fog are listed below in chronological order.

• September 14 - Investment bank Lehman Brothers files for bankruptcy protection
• September 16 - The U.S. Federal Reserve lends $85 billion to AIG
• September 19 - Treasury Secretary Paulson calls for $700 billion dollar bailout
• September 26 - Washington Mutual’s assets are sold to JPMorgan for $1.9 billion
• September 29 - House of Representatives reject $700 billion bailout
• October 3 - House of Representatives approves a “revised” $700 billion bailout
• October 8 – Global Rate Cut by the central banks
• October 10 – G7 pledges to work together to stabilize global financial markets
• October 14 – Paulson “forcibly” buys $250 billion dollars worth of shares from 9 of the largest U.S. banks

And so with a Trader’s Fog that is likely thicker than any other time in history, the most difficult thing for traders to know is how any of the major events listed above and how the subsequent reactions by the governments of the world will ultimately affect the market. As has been said in previous articles, so much has been done so quickly, that no one really knows if anything is really working or going to work going forward.

During this period of time, trader’s have seen volatility in the market set record levels. On October 9, 2008, the VIX, VXD, RVX and VXV volatility indices all set new record levels. These high volatility measurements are one of the strongest secondary indications of market uncertainty.

Truthfully speaking, the volatility indices aren’t really necessary. The balance sheets of major financial institutions and hedge funds continue to bleed red ink. We know that the US Treasury is back stopping banks and the big players on Wall Street, but we don’t know if the banks are backing main street. Here are some lingering questions: Now that liquidity is guaranteed by the government, how will banks evaluate each other? (We still have a LIBOR rate that is frozen) How will banks evaluate lenders with poor credit scores? (Will they just assume large amounts risk again?) If the banks do assume large risk again, what will be the impact on the dollar and the market if the Treasury pays the bills?

It is amazing to that the there is little or no discussion to reform the monetary system; all the discussion is about fixing a market that no longer believes it can be saved. There is no such thing as too big to fail; the market is about the re-distribution of wealth. If main street is really the concern of the treasury, then create a plan that directly addresses their needs – don’t prop up the same institutions that contributed to the problem in the first place.

When will the “powers that be” start a discussion about the intrinsic flaws of a monetary system based on fiat currency and Federal Reserve System that is supposed to prevent economic situations like this one. Why aren’t there discussions to consider reasonable alternatives to our monetary system, like the gold standard. Will there ever be discussions to reform lending practices and methods for enforcement of those practices.

The Trader’s Fog is not going to lift until the winds of change come. Unfortunately, the winds of change are being controlled by the political wind machine, a machine much too small for the job.
________________________

Patrick Patterson
Vice President of Operations
IntegrityFX, Inc. (Home of the Crossfire)
Toll Free: 1-888-355-3855
951.823.0686 office
951.823.0687 fax
PPatterson@IntegrityFX.com
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