A nice take on market fall

Sometimes few words are enough to explain a whole lot of madness. Here is Mark Tinker's (The Independent) take on the markets

This equity sell-off has had two legs to it so far, and any assessment of where it goes next needs to allow for the prospect of a third. The first leg, the sell-off in May, was largely a function of profit taking as a bout of price weakness triggered a rush to lock in the large gains of the first quarter. At the same time, a spike in the yen undermined the delicate financing structure behind many of the cross-border plays in emerging markets.

The second leg, the sell-off in June, was forced selling by traders, many of whom had embraced the notion that the dollar was going down and in effect bought commodities and sold the greenback. A rally in the dollar blew a hole in that trade and led to a sharp sell-off in many commodities, particularly precious metals. This is another reason why the Fed may pause: high commodity prices were almost certainly at the centre of its concerns over inflation.

So the potential third leg, and the key to continuing uncertainty, is commodity markets. If a fund goes bust, or there is a spate of redemptions, then we could get a sharp sell-off that spills into other markets.

And my favorite piece:

When cash is cheap and the herd instinct dominates, markets have a tendency to overlook fundamental weakness. New paradigms are invented and investors develop an ability to suspend disbelief. In effect they become speculators. Once that illusion is past, however, they are much more critical. The most speculative markets - some commodities, some property and most emerging economies - were certainly displaying these characteristics: the lesson of history is that once the whirlpool has subsided, the enterprise that was used to justify the investment is no longer there.