The press is reporting that the Royal Bank of Scotland and the Holding Bank of Scotland PLC (HBOS PLC) are both being seized and nationalized by the British government tonight. As Mish notes in his Royal Bank of Scotland, HBOS Nationalized, these actions do nothing to correct the underlying problems - insolvent financial institutions. As I write this, Asian markets for Monday October 14th, are showing some gains. But US institutions are closed tomorrow and Europe may involuntarily close their markets in an effort to calm the situation. I'm not sure what they expect that to do because that also doesn't address the underlying problem. However, reviewing the October 1929 crash, there was a multi-phase collapse. The biggest part occurred on October 29, 1929 but there were serious precursor drops and rallies along the way as well.
Because of this and because of various other observations, many people are expecting a short term rally in the market at this point. People really do want to believe that governments globally can solve this, whether they really can solve it or not. That belief will help fuel some form of rally, perhaps into the 10,000 range. Trying to outguess the crowds when we don't have any sort of reasonably accurate model is a difficult thing to do but my best guess is that this rally will last somewhere between a few days to a few months, ending not later than sometime in January of 2009.
A key point to take home from all these "rescue" attempts is to ask whether the action in question actually helps resolve the underlying problem of insolvency for a particular financial institution. If the answer is no, then it cannot succeed longer term. Given that zero actions thus far have addressed underlying insolvency issues, that means that somewhere ahead of us is a further fall downwards, perhaps below 5000 and perhaps even much lower. If we get very far below 5000 though, I fully expect the wheels to come off industrial society in Europe and the United States. Whether you do anything about preparing for that eventuality is your choice. But if you choose to not prepare, please don't knock on my door because I did choose to prepare.
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