The Real Reason For The May 2010 Crash

It was not a fat finger. It was not a flash crash. It was not cyber terrorism. It was a massive widening of credit spreads.

Finally, two and a half weeks later, a Bloomberg story contains a small clue, buried deep within a seemingly innocuous story about corporate credit spreads. The story quickly turns to the turmoil in Europe, then, near the bottom, just four short paragraphs up from the byline, there it is, in a quote by John Bender, head of U.S. fixed income for Legal & General Investment Management America:

By midday on May 6 “the credit markets were effectively not functioning,” he said. “Bid offers were so wide it was very difficult to get trades done.”

When banks do not lend to each other, everything stops. European banks were not lending. It was Lehman Brothers all over again.

When multinational media corporations put out cover stories within minutes of an event, you are dealing with disinformation. Fat finger? Flash crash? Those things, at best, are effects.

If you want to understand the cause of what's really going on in these markets, wrap your head around credit and debt.

Market Comment:
While I'm becoming less and less inclined to view the price action since April 26th as a B wave, I will continue to test my hypothesis when short-term buy signals appear, though high VIX readings make options expensive.