As we all have seen in recent months, the world has become a cascading wave of financial market volatility with almost every stock market worldwide suffering sizable downward corrections in recent weeks. As these markets lose value, it tells us that investors are pulling their money out of the markets. Traditional trends tell us that most investors, when moving out of stocks move into bonds, therefore; on days when the stock market drops, bonds benefit as money from stocks is placed in bonds.

This is, of course, the traditional model, but there is a historical precedent when both stocks and bonds declined at the same time. That time was the Great Depression. As you watch and wonder what market downturns mean, also keep your eye on many things which can tell you what is coming next. Factors such as drops in stocks and bonds at the same time, which signal wealth being cashed in and removed from the markets, increases in CDS (not CD’s that banks offer, but Credit Default Swaps) which tell us the likelihood of bankruptcy of the issuer of the CDS.

Tags: CDS, Credit Default Swap, Iceland bankrupt, pyramid scheme