What just happened in the markets?

I got a wager with my father in law that we will see DOW 11,000 by the end of the summer. I took that bet with him at the beginning of the week when the DOW was at 11,800 as of this afternoon it is 11,300. He doubled down.

Obviously this is a wager I would like to lose.

Leading the charge on the way down are the financials and GM. The financials are understandable. In a nutshell, housing has dropped 20% generating .5T of losses on the banks most of which is being brushed under the FED TAF and repo carpets. The FED shock absorbers have the same length to go in reserve. According to historical level of income to housing price, there could be an additional 10% to go on the way down in the best case scenario, most probably there 15%, maybe 20 if we overshoot. Essentially we may be at 60 of the housing and the FED shock absorbers may absorb most of the subprime shock.

Then there is GM, I haven't looked at the details, but with the prices of oil where they are, you know all the big trucks that they normally sell have got to be hurting.

Inflation is everywhere as a result of oil. However the inflationary spiral of the 70's doesn't seem to exist. Do not mis-understand this, yes the prices are going up but your wages probably aren't. The 70's oil shock started a wage/price spiral. Prices KEPT going up (so did wages), it became a YEARLY thing. This time however unions are weakened, the workforces outsourced everywhere. So the initial shock of inflation may stop there, it will not kick off a wage/price spiral, we will all just be poorer. We will take it in the teeth but prices can't run forever if wages don't follow.

While there is a sell-off, the VIX, the index that monitors the sales of options, the instruments that hedge portfolios and indicate sentiment about the future HAS NOT GONE IN PANIC LAND YET. I don't know what to make of this one, couldn't find anything in the press either. Best case this means people do not panic, maybe we are through panicking. Worst case it means people do not have the money to buy themselves insurance and we are not "swapping losses" (which cost money) we are just "losing" money, period. The one big problem with this is that means even more losses for the banks as derivatives are the most profitable products for the financials.

If that is the case, then this is not the bottom, it is just the VIX is not picking up the right signals anymore and we will be seeing further damage in financials.

The FED has maintained the rates at 2 this week. Indicating they are stuck with this inflation and the need for growth. Stuck on neutral, pure stagnation.

My take on things is that this may be the last shoe to drop. How far will it drop, I don't know. I hope I am wrong on my wager and we are in for a massive bear rally next week. I am waiting for the last action by the FED. It will probably be triggered by another financial near-death experience (Bear style) and will result in a bailout or a final dramatic increase of the TAF facilities for the final 500B on the FED balance sheet.

After that, the FED will be all-in and the markets will be on their own. I do not believe the FED will print money in this inflationary environment. The safety will be off. No more backstopping, that being said it will have been a liquidity injection without money creation, pretty neat.

Interesting times! If a bit scary.