The more critical point that Zweig fails to mention and most investors and traders never realize, overlook or forget is that any investment or any trade in any timeframe and based on any analytical method is a bet on ONLY ONE THING – that some other human being is going to be willing to pay a different price than you paid at some moment in the future. Markets are no more and no less.

This may seem self-evident or unimportant to some – after all, we have our fundamentals or our technical analysis and we really only need to bet on the numbers! Really? So how did betting on those things work out in the past 18 months? How did all those hedge funds do using their historical volatilities going into September 2008? Or, those day-traders with fixed stops?

See the numbers – whether from a chart or a projected cash flow – are only a reflection of or proxy for what another human will decide in a given set of circumstances. Take this example, after the run on BSC a year ago this coming week would it have been that hard to imagine that one of the other banks could go down altogether? Would it have been that hard to imagine that Paulson could buckle under the pressure and let someone who had lots of credit-default swaps go BK?

Not if someone paid to predict the markets stopped looking at the numbers, put their feet up on the desk and said … hmmm… let’s think about this purely from human behavior for a moment.

It works in much shorter time frames too – like yesterday afternoon when the ES was trying to make new lows but the speed of the downdraft had slowed and the NQ wasn’t moving down… you see that and you can be sure people are still getting short ES and there is about to be a huge short squeeze. But… if you dont’ think about the other trader’s behavior, your numbers and charts may have said shorting again was a good idea. Especially because your brain defaults into expecting the same result out of the next decision as it got out of the last – another fact that Zweig doesn’t fully articulate even if he did write Your Money & Your Brain.

If the markets are based on confidence (or lack thereof) then where are we in the spectrum between panic and overconfidence? We are certainly on the left-end of this tug of rope. The panicked selling seems to be gone but now we are in a market rhythm where it is just relentless. In other words, there may not be panic but there surely isn’t any confidence that the government funding banks, insurance companies and now apparently the auto-industry is going to work.

Without confidence for the future, we will continue to look towards the lows of October and maybe beyond… is there any reason to do anything else?

and furthermore “Decided that purchasing illiquid assets wouldn’t help” …since when does bringing in a solid bid in a falling market NOT stabilize the market. Paulson may be from one of the great trading houses in the world but he doesn’t get that. The underlying problem in all of this is there was and is no market for the complex debt instruments that are for sale. If someone could make a market then the price would stabilize… and once that happened then the mark-downs on the books of banks would stop and once that stopped, they may be more willing to lend.

…. Can we get a trader in there? Can someone from the Chicago floor environment teach them something about making a market?

PS Thursday the 13th – okay there is the m-t-m accounting issue but they could solve that if they wanted to. I predict that in some way shape or form the new Treasury and Administration in DC will sooner or later end up buying some of these assets. Who else is ever going to make a market in them?

Early in the week, I had the enormous privilege of attending the CME’s Global Financial Leadership Conference. Beginning with Paul Volker and ending with Burton Malkiel, the 36 hours taught me more than I think I have ever learned at any other single conference.

The question that keeps coming back to me is what if there had been a public market for structured mortgage products, market-makers for credit default swaps? Would we be here now? While DC raises the value of regulation and tends to blame the speculator, all I can think is specs could have helped us avert this problem altogether. Bob Schiller, who wrote Irrational Exuberance and The Sub-Prime Solution, and others at the conference seemed to agree.

Not an easy task, no. But clearly a necessary one.

Thoughts anyone?

Early in the week, I had the enormous privilege of attending the CME’s Global Financial Leadership Conference. Beginning with Paul Volker and ending with Burton Malkiel, the 36 hours taught me more than I think I have ever learned at any other single conference.

The question that keeps coming back to me is what if there had been a public market for structured mortgage products, market-makers for credit default swaps? Would we be here now? While DC raises the value of regulation and tends to blame the speculator, all I can think is specs could have helped us avert this problem altogether. Bob Schiller, who wrote Irrational Exuberance and The Sub-Prime Solution, and others at the conference seemed to agree.

Not an easy task, no. But clearly a necessary one.

Thoughts anyone?