Funny thing about investor confidence: often as not it relies more on faith than facts. Give it a little unsettling heat, and it can just melt away. Belief turns to fear, then blind panic.
Insight number two: the bigger you are, the more scared you tend to get. So what appeared to be a sudden Japanese loss of conviction regarding the U.S. Treasury's ability to meet its standing obligations received close attention from the world's bankers, from Zurich to Hong Kong. The Japanese securities outfits just kept dumping, and nervous phone inquirers from locales as diverse as the White House and Red Square were all advised that everybody was "in a meeting and will get back to you." As a natural consequence the world's major financial players succumbed to a terminal case of nerves.
When the bond markets finally reopened on Wednesday, Treasury's thirty-year issue had scooted up four full interest points. There was still a market for Uncle Sam's IOUs—everything on this planet will move for a price—but buyers were wary. They wanted their newly perceived risk sweetened considerably.
Predictably rates on corporate and municipal bonds did a similar tango north, leaving America's conservative investors wondering what hit them. In fact, a lot of scheduled corporate debt offerings were scuttled to await more settled times and lower rates.
The dollar also stayed on the critical list. Everybody was worried the U.S. Treasury might just rev up the printing presses to produce enough greenbacks to pay off all the foreigners who wanted their money back. Since Paul "tight money" Volcker—who probably would have thrown his robust torso onto the ink to prevent that from happening—was now gone, there was nobody at the Fed with a real commitment to holding back the flood.
And the stock market. People weren't starting to call this Black November for nothing. A lot of players feared that the higher rates would hobble the economy, a perfect excuse to head for the exits while the getting was good. As Henderson liked to observe: psychology is a fundamental too. The next day the Dow sank another two hundred points; the day after that a hundred more. (Where had those sellers been two days before?) The fourth and fifth days it slowed, heaved an audible sigh of exhaustion, and sort of peered up out of the bunker to see if the bombing runs had let up. The downward pressure was still evident, but it was finally losing some of its steam.
Yours truly did a lot of thinking as the week wore on, while the country appeared to wobble on the brink of unprecedented disaster. I also conferred now and then with Jack O'Donnell and with Henderson in between their appearances on TV chat shows. Although Bill's bearish reading of the nation's estate had been vindicated well beyond what even he had envisioned, I can report he took small pleasure in his newfound celebrity; he was increasingly miserable over his own missed opportunities in the financial casino. Jack, for his part, had gained a profound appreciation of the helplessness of government to intervene when fear and greed seize the marketplace.
My personal ruminations on the situation turned out to be too Machiavellian for anybody to entertain seriously. Question: If you wanted to pull all your money out of the U.S., is this how you'd do it? Answer: No way. Instead you'd go about it gradually, a little at a time, in order not to stampede the markets and cause exactly what was happening now.
Ergo, I concluded, this isn't real. Noda just wants every