Bipolar Markets

"Although the stocks regained some of their losses from earlier in the week after the rate cut, most experts believe that this volatility will be around for months - or possibly until the end of the year."

It's up; it's down…it's up again…

Violent mood swings took control of the markets this week, as they reacted to the volatility in the credit and mortgage markets, which has been exacerbated by the housing bubble burst. All in all, it's been an interesting August; a month that is usually pretty tame as far as the markets are concerned.

After the injection of billions of dollars in the markets didn't seem to have any effect, the Fed tried another medication on our bipolar markets, in the form of an emergency rate cut. FOMC announced that they would be cutting the discount rate by 0.05 percentage points on Friday morning - the markets breathed an audible sigh of relief…and subsequently rallied on this decision.

Although the stocks regained some of their losses from earlier in the week after the rate cut, most experts believe that this volatility will be around for months - or possibly until the end of the year.

"The bottom line is the credit situation, the subprime situation, and the confluence of these items runs a lot deeper through the Street than a Fed move or even a Fed rate cut can fix," said Chris Johnson, chief investment officer at Johnson Research Group.

Many analysts commenting on the situation used the term "wake up call" - particularly when they were talking about the central banks.

"The lack of monetary discipline has become a hallmark of unfettered globalization," said Morgan Stanley's Stephen Roach. "Central banks have failed to provide a stable underpinning to world financial markets and to an increasingly asset-dependent global economy."

"The current post-bubble shakeout is hardly an isolated development. Basking in the warm glow of a successful battle against inflation, central banks decided that easy money was the world's just reward. That set in motion a chain of events that has allowed one bubble to beget another-from equities to housing to credit."

We can't jump from bubble to bubble forever…after all, as we noted in our last book, Empire of Debt, eventually, everything regresses to the mean. Interestingly, a Baltimore talk radio host, Ron Smith, thinks that is what is happening now - a reversion to the mean. He talked about this on his show yesterday…and gave Empire of Debt a little shout out:

"Market commentators are forced to utter ever more unprovable assertions about what the future looks like for stocks, bonds, and all the myriad financial derivatives traded electronically across the globe," Mr. Smith wrote in an article on his WBAL website.

"If you want to glimpse the full picture of what's led to this latest financial crisis, understand this cosmic reality as stated by Bill Bonner and Addison Wiggin in their book, Empire of Debt: The Rise of an Epic Financial Crisis."