Progress on the road to revulsion

In our yearly outlook we analysed that the financial crisis may not only lead to a solvency problem in government debt but also may lead us to a necessary change in financial culture.

The Kindleberger-Minsky-Model of economic cycles describes this process from boom to crisis to revulsion and displacment.

It is a market principle that every bear market has a goal: the goal is to devalue the assets or behavior that lead the past boom. If this is a bear market of financial culture, what is our thesis, than the goal of the bear market, started in 2007, is to "correct" the financial behavior of the last 20 years.

The developments of the last 24 hours gave me the impression, that markets are becoming increasingly instable and that malfunctions occur more frequently than in the past. Do we have a market authority supervising at least the regulated markets?

Another aspect, and that was a thesis in our yearly outlook for 2009, is, that this bear market is also a bear market in trading volume, as more and more market participants have to cut their investments due to tight risk budgets or investment restrictions. This also lead to error-prone markets.

The only good thing of the developments from the recent past is that risk perception is climbing fast and that more and more investors got into panic mode. If markets are still operating, than at least a stabilising reaction should be immanent.