Once upon a time about a decade ago, some hedge managers went to the bank and tried to withdraw funds sufficient to cover redemptions and learned to their clients’ and their dismay that that would be somewhat problematic. Those attempted transactions soon turned into the proverbial sweater with the protruding strand of wool that, pulled on, unraveled. It has taken all this time to investigate what exactly happened, and why it was that nobody saw it coming.  In fact, even in 2007 we still hadn’t arrived at completely clear answers for the dot com bust at the turn of the millennium. Many comparisons are made between those two crashes. And many comparisons are made between today’s market conditions and each of those two crashes. These discussions are fascinating but there are still more questions than answers, one aspect being that the high times of 1999 really did reflect an enormous level of euphoria—textbook top levels. The 2007 top? Not so much. After all, there couldn’t be another 1999 type feeling after 9-11, right? There was also a tremendous amount of “bad vibes” in the U.S. (and elsewhere) over the war in Iraq and for those old enough to remember, it was feeling a lot like Vietnam. That kind of killed prospects for a euphoric feeling at the top for the duration. And yet, a top it was, with or without the euphoria, and the mortgage meltdown trip downstairs was huge. Now we’re at all-time highs again, and the usual debates have ensued, chief among them “the market they love to hate.” This is meant to address the idea that “it can’t be a top because there isn’t sufficient euphoria.”

The other big difference between the dot com crash and the mortgage meltdown was that the dot com crash was a logical value correction reflecting the fact that companies with no earnings were selling at gigantic valuations, whereas in the mortgage meltdown, it was the infrastructure of the financial system itself that was collapsing. All by itself, AIG, because of its derivatives insurance activities, experienced losses so large that they threw the entire S&P 500 into an aggregate earnings loss, something that hadn’t happened since the Great Depression.

Then trillions of central bank activity followed all that and now we are wondering where we are, seeing huge amounts of sovereign and other debt and equity on central banks’ balance sheets, much of that issued or trading at negative yields. It is an entirely new world that can only be described as weird, as money from all over the world seeks safe haven in the United States, the locus of the derivatives’ creation that created the chaos.

Having said these things in a sort of hodgepodge style recap, I think the big question remains what it always is: what is the sentiment that signifies a top, and what is the sentiment that signifies a bottom? Is it really about fear of the world disappearing at bottoms and the euphoria that the party will never end at tops? Or are there other ways to recognize tops and bottoms? Other kinds of sentiments? Or other indicators entirely?

One of the topics that discussion of why the financial infrastructure came unglued in the mortgage meltdown got me to look into was how banks, brokerages, investment bankers, venture capitalists and insurers view and measure risk. Because one of the few unambiguous sets of data that came out of both the dot com crash and the mortgage meltdown was leverage in the financial industry itself, and how high it had gotten. This is what directly led to the demise of both Lehman and Bear Stearns. And those were huge hits to the system, as well as huge hits to personal income once these firms bit the dust and the big paychecks earned at these outfits stopped getting cut. When hearing that a lot of people will say “how big a hit can it be to lose the payrolls of just two firms?  And the answer is “a lot bigger than you might think.” Even if you’re only talking about a couple of thousand people averaging $50 million in average annual income, that’s a $100 billion hit. That adds up to a big reduction in dinners out, shoes sold, Broadway shows seen, trips to the Bahamas taken; a major loss of tax revenue, and immense ripple effects.

There are two ways business—and individuals, for that matter—can take on the kind of leverage that creates this sort of exposure. The first kind is when they are so giddy that nothing can go wrong, they just blindly figure that the more the leverage, the more the cash register rings. That could be said to be a very quantitative measure of euphoria. The Hunt brothers did it back in the 1970s in a vain attempt to corner the silver futures market in a very worrisome environment marked by the Arab oil embargo, the New York bankruptcy, and inflation, and they nearly pulled it off. Unfortunately, they also brought down the predecessor to Bache Halsey Stuart Shields, eventually swallowed by Prudential in the interest of systemic stability.