As this crisis has evolved over the years, I find my set of tabs in firefox has changed. The evolution of this set of things-to-watch is mildly interesting.
- The first place to focus on was US housing construction. US housing was clearly in stratospheric territory. Once the US Fed started raising rates, and Mortgage Equity Withdrawal became less important, trouble was going to come about in US home construction. In this period, I watched the DJ US Home Construction Index.
- By mid 2006, it was clear that big damage had taken place in this industry index. (E.g. see this article in Business Standard in September 2006). The next shoe to drop was the firms that had financed homes. Hence, my focus then shifted to US housing finance companies. By mid 2007, it was clear that big damage had taken place in this industry index.
- Now the question became: where in the world of financial firms does the damage go? My focus then shifted to the DJ US Financial Services Index. And, by this time, it was clear that there were deep problems in the money market, so I started watching the TED spread. At first, after the death of Bear Stearns in March, US Financials bounced back and it looked like the trouble would subside.
- And then, after the death of Lehman, the real question became: what would this do to the broad US economy. Now we're all down to watching the S&P 500 and VIX.
With VIX at 58, isn't it time to be shorting VIX? (You might like to see this slideshow on the global financial crisis, from a few weeks ago).