The return of the mean market Mr Bear is certainly exciting but I expect for most investors and traders the excitement will be mixed with a lot of pain.

After cheering up investors yesterday the return of the mean market Mr Bear didn’t take very long. Only one day after making a 420 point one day gain on the Dow averages, the best one day moon shot in over five years, the market gave back about 70% of the gain, closing down about 293 points on the day.

What can you say about such market volatility?

Certainly you can be sure that investors and traders are currently a nervous, emotional, fearful bunch. One day they get excited about a big advance, thinking a bottom may be in place, only to revert to the fear the very next day that there is no bottom. At least nowhere near present levels.

The financial turmoil that is playing havoc with the markets, really all of them, stocks, bonds, commodities, gold, and forex, has been building for a very long time. The loose money policies of the Greenberg Fed and the run and gun, anything for quick fee and commission bucks, mentality of an entire generation or two of Wall Street operators pretty well assures that the current mess has a long time to run.

The bigger the bubble the more time it takes to correct and to reach a reasonable trading level. The worrisome thing is that just as markets tend to overshoot what’s reasonable on the upside they tend to overshoot reasonable evaluation levels on the downside. And the downside happens so much faster than upside market action. Mr Bear is an impatient fellow.

Smart people who really should have known better used complicated computer programs to evaluate risk. Guess what? As long as almost all asset classes were moving ever higher those fancy risk management programs manned by some of the nations brightest minds calculated that the risk was small.

Hey, with a small risk you can lend to whomever you want and stuff your own investment account, and the investment accounts of compliant investors worldwide, with absolutely toxic waste “investments” that are magically transformed from garbage to AAA rated investments. And while you are at it, since the risk of an adverse outcome is so small, like it will never happen in a trillion years, why not maximize your returns by using 30 to 1, 50 to 1, or even 100 to one leverage?

What a system. Some very smart people did some very dumb things. But for a few years everyone playing this game got rich. Except for the unfortunate investors. Unfortunately, all of the smart people involved in financial engineering the derivative junk and the army of Wall Street sales people, forgot to ask one very simple question.

What happens if prices fall instead of going up each year?

And the answer to that question is about to become crystal clear. Not many people will like the deleveraging of investments and the implosion of credit facilities. There is going to be a lot of pain not only on Wall Street but worldwide. Only the lawyers will be happy as this sad story of greed overcoming fear and caution unfolds.

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