I'm not saying anything readers of this site don't feel viscerally, but what incredible times. Absolutely astounding. Tuesday's carnage on Wall Street after Monday's mess ... to see Iceland teetering on a species of receivership ... to see the Nikkei off 10% overnight ... to see the U.K. banks being partially nationalized ... and the Fed buying commercial paper ... remarkable. If this kind of fear we're seeing in the equity markets -- stocks have had the worst five days since the Depression -- doesn't speedily turn into some sort of temporary bottom on the market I genuinely don't know what will. Truly.

Of course, in a sense it doesn't matter. The damage has been done. The global banking system is a mess, like a patient that has been poked by too many interns and fed (no pun intended) too many experimental medicines. It's impossible to know any more whether it's the illness or the medicines that are hurting things here. And even if we have jury-rigged a semi-functional banking system again, the rapid contraction of the real economy is set to feed back into the financial system, causing more credit problems. The effects will be vicious.

I am trying hard to look through all of this to see what things look like on the other side. And I can see faint outlines, for sure, but that other shore still seems awfully far away.

After an initial paroxysm downward, there two worlds in capital markets today, depending on whether you're in the U.S. or ... pretty much anywhere else:

[Update] Well, that ended quickly.

Let's think about surprises. It seems entirely possible that we see at least some sort of technical bounce in here somewhere, so let's get past that and think about the future. What surprises lie ahead, whether positive or negative? And to be more explicit, let's try not to get hung up in each case whether each thing really is good or bad news, but whether it's seen that way.

"Good" surprises

• Treasury announces first purchases under TARP program
• Fed announces first direct efforts under CP program
• Earlier bottoming in housing inventory in some major markets
• A successful (meaning non-catastrophic) Lehman CDS settlement auction
• A SWF or major Japanese bank making one or more major financial services purchases in U.S. market.

"Bad" surprises

• Further beggar-thy-neighbor nuttiness by EU members, leading to more bank failures and an EMU exit by one or more member countries
• A major U.S. state defaults
• A major LTCM-lite hedge fund unwinding, or the cumulative equivalent of same
• A material decline in the U.S. dollar
• Positive feedback into financials from weakening consumers leads to more bank bailouts and foreclosures than expected
• China hitting a growth air pocket and declining to y-o-y growth below 5%
• One or more major Aaa non-financial issuers is downgraded and at risk of default.
• Commercial real estate loans becomes mini subprime collapse as over-extended companies begin failing

Feel free to add more.

[Update] People are adding some interesting ones in comments. Read 'em.

Just in case you were thinking that it's you feeling worse than you've ever felt with respect to the current decline, it's not. It's the market. Year-to-date, this is now the worst decline in U.S. stock market history.

[via Bespoke]

Some big and seductive moves going on, not least of which in tech, which was heavily beaten in the hedge fund GS VIP unwinding for redemptions. Look at this histogram of top-moving names among the larger cap tech stocks:

[Update] So much for that. By the close things had reversed themselves sufficiently such that the number of techs doing wacky things was back to relatively few. What an intraday adventure.

There was a surprise today in the treasury market, with multiple issues reopened and more treasuries sold into said issues. But it was done in a huge hurry, with the market given something like an hour's notice, as if someone at the Fed was double-parked outside.

Anyway, getting $10-billion in liquidity was a costly bit of business, with the yield coming in 40 basis points cheap to the prevailing levels in the market. That lead John Janson to the following conclusion about how costly it was:

In bond market jargon that 40 basis points is known as a “tail” or the number of basis points from where the issue was to the level at which it stopped. Most auctions come “on the screws” which is more jargon for the notion that they come essentially where they are trading at auction times. A typical “sloppy” auction might “tail” 2 basis points. There are 5 basis point tails and I can recall 10 basis points and even 15 basis point tails. They are rare. Extremely. In all my years I can not recall a 40 basis point tail and shall proclaim this the record holder.

Now to place that in dollars and sense terms for the taxpayers of the USA I offer this. On that bond every basis point is worth a little more than $600 per million bonds. Multiply by 40 basis points and you get $24,000 per million. The auction size of $10 billion equates to 10000 million. Multiply by 24,000 and the product is $240,000,000.

Ouch.

More here.

Sequoia Capital, one of the smarter venture firms in Silicon Valley, apparently organized a meeting yesterday for its porfolio companies telling them to get ready for a long economic downturn. It suggested ways to cut costs, and told them to prepare themselves now.

Apparently denial is officially over in the Valley. More here.

Interesting new Federal Reserve Board paper out making the argument that changes in house prices hit property taxes -- and thus state coffers -- with a three-year lag. In other words, if you think states are suffering now, give it a little more time.

The Connection Between House Price Appreciation and Property Tax Revenues

Byron F. Lutz
2008-48

Abstract: This paper explores two aspects of the connection between property tax revenues and house prices. First, I estimate the elasticity of property tax revenues with respect to house prices. This elasticity does not necessarily equal one as governments may adjust effective tax rates to offset changes in property values. Second, I examine the timing of the relationship. Institutional features of the property tax make it unlikely that changes in house prices will immediately influence tax revenues. The results suggest that the elasticity eventually equals 0.4 and that it takes three years for house price changes to impact tax revenues.

Apparently Bill Gross's luck didn't stop with his latest Pimco missive wherein he said the Fed needing to begin buying commercial paper. Recall: That came out only an hour before the Fed announced just such a program. Now, according to a release on the NY Fed site, his firm is in discussions to be "in support of" said newly-launched commercial paper program. Gosh, Bill is the luckiest guy in the world.

Statement Regarding Asset Management Services in Support of CPFF
October 8, 2008

The Federal Reserve Bank of New York announced today that it is in discussions with PIMCO regarding asset management services in support of the Commercial Paper Funding Facility (CPFF), a facility that will complement the Federal Reserve's existing credit facilities to help provide liquidity to term funding markets.

Somewhat more seriously, Bill is a smart guy, and Pimco is a highly capable firm, but giving close access to credit programs so quickly to such a large player in those markets would be like giving control over Treasury or even the person buying toxic assets to someone from Goldman Sachs. Oh wait, we did that already. Never mind.