The last time we provided you with market commentary was in late May.

You might recall, that our position since last summer was that when the Fed took action to constrain inflation, all the markets that had been elevated by easy money policies and zero interest rates would face a challenge.

The market had fallen so far and so hard by our last visit, that we suggested a respite, at least a temporary contra trend rally. We got one from late May into mid-June, but it was feeble and short-lived.

Since then, it has been like being mauled by a Kodiak bear. In 5 of the last 7 sessions, more than 90% of stocks on the NYSE fell. According to Jason Geopfert at SentimentTrader.com, this is the worst bout of selling in the S&P since 1928!

From the May 27 temporary peak, the most widely followed average shed about 11.5 %.

About the only positive thing you can say about this is that such extremes tend to indicate capitulation. Maybe we get the contra trend rally?

On the NYSE, 7531 issues are below their 200-day moving average, one of the most lopsided readings ever. So, while the percentage losses are still within the “normal” range as bear markets go, the market internals is breaking records. Weakness has been severe and very widespread.

The Fed has painted itself into a corner.  If it did not fight inflation by reversing policies, markets would lose confidence that they were serious and inflation would run wild. Previous fake attempts to slow down money growth and raise rates had ended at the first sign of pain, and so the Fed had to deliver or their credibility would be shot. 

They started late to the game and many market participants did not take them seriously. Remember when the Fed said they wanted inflation above 2%? What a policy catastrophe!

If they address inflation urgently, it meant most markets that have flourished over the past decade would be in big trouble when the policy is reversed. That was the basis of our macro thesis and that certainly has proven to be the case.

We called this the “investor’s dilemma” because there just are not many good choices when multiple markets have been elevated by easy money to extreme valuations, and then the monetary regime is reversed. Even cash, which is price neutral, is losing almost 9% per year because of the Fed and Biden-instigated inflationary policies. However, losing 9% is better than losing over 20%, and then losing the 9% in addition anyway because stock prices too are quoted in dollars losing value.

However, as we pointed out, he who loses the least is the winner in a bear market.

Markets put in a remarkable performance last year with stocks up 28%. We started 2022 near 4800 on the S&P 500 index. By early January, things started a severe downhill slide and it has continued with little interruption.

As of this writing, the S&P has now dropped 22%, officially in bear territory. Many other indices had already reached that threshold and have gone even further. This is also true of most foreign markets. In short, there has been no place to hide from the claws of the bear.

With rates rising, both stocks and bonds have been put under pressure, undermining the classic 60% stock, 40% bond allocation used by many advisors.

Both stocks and bonds have had the worst start of a year, in half a century so those doggedly determined to hang on to classic portfolio design have been hit hard.

Welcome to Biden economics!

Equity bear markets historically lose about 35%, on average. With losses now around 22%, that suggests we still have more to go. How much is unknowable. We will likely have bounces, but the trend is down.

A famous adage among those that practice technical analysis is that “a trend in force, is a trend in force until proven otherwise.”While very oversold at present, there has been no reversal yet of the bearish trend.

Just remember that an “average” is a mixture of prices, including high and low extremes. Given the extraordinary spending, deficits, market interference, a long period of zero interest rates, and speculation in everything from stocks, bonds, SPACs, NFTs, cryptocurrencies, art, and real estate; we can’t be assured this cycle will be average. Historically markets have a kind of symmetry, that is the more extreme the up cycle, the more extreme the down cycle.

Thus, the honest answer is nobody knows how bad this will get.

Much of the pattern since 1987, has been the Fed “put”. The “put” were both actions and statements made by the Fed that suggested to investors that the Fed had their back. They would cut interest rates and gun money growth to shorten and cushion the severity of stock cycles. But in so doing repeatedly, the Fed trapped itself. Today, rates can’t lowered if they are already zero, and the money supply cant’t be increased  if double-digit inflation is on the loose.

In the past, the exercise of the “put” was a constant interference in the market’s natural response to cleanse itself of excess.

Therefore, with today’s inflationary excesses, the Fed “put” appears inoperable. They now are much like a fire department that rushed to put out every little brush fire, allowing excessive underbrush to build up. Now they show up with a pumper truck empty of water facing a conflagration of their own making.

Stocks are not alone in this mess. Bonds have been remarkably weak with high yield or junk bonds getting pounded badly of late.

Cryptocurrencies have not proven to be anything like a store of value or alternative currency. The best ones such as Bitcoin are down a whopping 70%! And others have turned out to be either a fraud or so poorly constructed they could not function once investors wanted to get out. From a market cap slightly above $3 Trillion just this past October, we are now under $1 Trillion. Yes, $2 Trillion just vanished.

We sense, but cannot prove, that much of the rout in cryptos has spilled over into the stock market of late. There were skeptics, ourselves among them (see the archives for Cryptocurrencies and Financial Speculation). But little could be done to counter the hype. This raises an important question: where were the regulators?

Crypto promoters had an endless stream of sports figures and sexy media stars promoting their claims. The explanations were so complicated that many felt, even if they themselves could not understand the arguments, the complexity itself was proof of the brilliance of the promoters’ claims. You don’t want to admit confusion or doubt, do you? It is better to follow the Kardashians.

At this juncture, we are moving from modest losses in most people’s 401Ks to severe losses. If both stocks and real estate buckle together (and there is increasing evidence they are), families will have to pull back on spending.

Unlike the stagflation of the 1970s, we still have low unemployment and a record number of job openings. But if employment weakens along with the household net worth, consumers will become desperate.

There is already some evidence that the last few months of soaring credit card debt is consumer response to high food and fuel prices. Consumer spending is 70% of GDP. You can’t have the consumer get into trouble and avoid a recession in the real economy.

That is when the bear moves from Wall Street to inflict his depredations on Main Street.