Foreign markets sold off rather briskly overnight and this morning. U.S. index futures were down pretty hard in sympathy. Doubtless the powers that be will be working hard to re-assemble Humpty Dumpty in time for tomorrow’s opening. The chances of an “emergency” rate cut in the morning are excellent, I would say, given the Fed’s predilection for attempting stock market manipulation. Pimco’s Paul McCulley speaks for the Keynesians when he says:

“In the fullness of time, there comes a time when time is full. Now is such a time: promises of “substantive” ease to come, on a ‘flexible’ basis, are no longer sufficient, they must be honored. The Reverse Minsky Journey has now gone into overdrive: systemic debt deflation, begetting rapid de-levering and asset price deflation, is upon us. The ‘neutral’ real Fed funds rate is plummeting. The Fed must catch it, not on the installment plan, but for cash delivery. The negative feedback loop that (Fed chairman) Ben Bernanke and (Fed governor) Ric Mishkin (recent speech HERE ) have spoken so eloquently about is no longer a risk, but a reality. Such a loop is self-feeding, not self-correcting. Only the Fed can interrupt it. Time is of the essence. What needs to be done needs to be done. Now.”

Of course, the assumption here is that easing rates is going to help. The problem is that lenders are worried about principal repayment, not about interest payments or rates. Their lending capability is impaired by loss of capital, the poster children being the bond insurers like Ambac which are being put out of business by the overwhelming losses. Easing rates did not work in Japan, the only similar situation in modern times. I do not expect it to work here.

Of course what happens on a short-term trading basis is virtually impossible to predict, unless you are one of the boyz with the muscle to move the markets and even then it could be tough if panic volume emerges. I intend to sit tight until I see clear signs of a substantial “clearing rally” as Hussman calls them. From my point of view, the risk is in not being short. If the market rallies, that’s fine with me, it’ll be coming back down and a chance to add to my shorts higher would be welcome. If it doesn’t, well, there’ll be a time to take profits regardless of technicals if there is a real crash. At some point, you have to say, “that’s enough” and then look to making sure your cash is safe. OptionsXpress, with whom I have an IRA account, has just announced an “FDIC sweep” feature which seems pretty good. They sweep your cash into up to ten different banks, staying under the $100,000 FDIC limit with each one. I can’t imagine any reason for holding more than $1 million in cash overnight when it is so easy to buy and sell Treasuries, and you have the proceeds the next day (IRAs are cash accounts, not margin, so you can’t have it the same day).