Last week’s twin 1,000 point plunges on the Dow were not errors. Instead, these close-coupled massacres, which wiped out $4 trillion of global market cap in two days, marked the beginning of a bear market that will be generational, not a temporary cyclical downleg.
What hit the casino wasn’t an air pocket; it was a fundamental change of direction, signaling that the three decade long central bank experiment with Bubble Finance has now run its course.
Moreover, this epochal pivot is not tentative or reversible in any near-term time frame that matters. That’s because the arrogant but clueless Keynesian academics and apparatchiks who run the Fed think they have succeeded splendidly and that the US economy is on the cusp of full-employment.
So they’re now hell-bent on positioning the central bank for the next downturn. That is, they are reloading their recession-fighting “dry powder” thru interest rate normalization and a second giant experiment—-this time in shrinking their balance sheet by huge annual amounts under a regime called quantitative tightening (QT).
Needless to say, both the magnitude and the automaticity of this impending monetary shock are being completely ignored by Wall Street in favor of bromides like “the market knows” QT is coming because the Fed has been transparent in its forward guidance.
So what? Knowing the steamroller is coming doesn’t stop you from getting crushed if you remain in its path. In fact, the $600 billion annualized bond dumping rate incepting in October is a fearsome number; it’s larger than the entire $500 billion Fed balance sheet as recently as the year 2000.
By your way, that had taken 86 years to accumulate through two world wars, the Great Depression and 9 lesser recessions. Yet that monumental change of dimension has faded from the working knowledge of Wall Street punters and commentators alike only be virtue of the insane 9X expansion to $4.5 trillion that occurred over the subsequent 14 years.
Moreover, you can count on the Fed’s impending bond selling spree to get a turbo-charge from the bond pits.
Read more at David Stockman’s Contra Corner.