The market has entered into what is already a small correction but could well be a large one or even a crash.
I tend to think it’s a crash but only time will tell.
A lot can happen from one day to another.
One thing that could happen is more QE.
This would take the shape of the Fed stepping in again and cancelled or extending the taper or in other countries an extension of low interest rates for long than promised.
We can discount Europe because they have recently said they will begin their own QE but the UK and US have indicated clearly and for a long time that their interest rates will rise and those days are fast approaching.
So the market swoons.
So the thought is to save a big correction or crash the Fed will step in and print more money.
If it did, the market would not crash. It actually might not be able to as the new QE would likely go straight into the equity market bolstering it.
That is not impossible and at some level it makes sense.
However it would be a bleak day for the world economy if it was to happen and would demonstrate that the era of free markets was at an end until further notice.
Markets crash. They always have, they always will. Even if governments try to ban crashes or for that matter they try to ban markets themselves.
Granted no one likes crashes, but there is no symmetrical call to ban bull markets. Markets are symmetrical if you try and corner them there always follows a moment of chaos and catastrophe.
If the policy makers of the US were to be set on banning 15-30% falls in the stock market they would have truly left the path of modern market economics.
Stopping crashes would not be protecting an economy from systemic failure, one of the true purposes of central banks; it would be instead the sort of action normally associated with crippled economies desperate to placate their lumpen proletariat for a few months more.
It could happen but looking back to 2008 when the economic system of the west was in melt down you can say the American action to avoid systemic failure of the global economy was well executed. The task was a giant one and barely a hitch the required intervention to hold the system together and get it healing was executed with great skill.
The taper itself has been well done. They have brought the level down to a trickle, asset prices have stopped soaring and now an inevitable correction is unwinding some of that excess.
Moral hazard was an idea that was often used by doubter of government intervention since the crash of 2008 and that idea has been discredited because sometimes when conditions are severe enough the situation needs to be save at all costs.
However when matters are minor, like a normal 20-25% fall in the stock market, it matters that participants are not rescued from the consequences of their behavior. If you don’t a vicious circle of behavior with make the problem worse. This is not rocket science its economics 101.
So as this correction, crash develops, a move set by the end of trillions of dollars of injected liquidity, it will be interesting to see whether the so called “powers that be” consider they are the arbiters of the market or whether they will allow the free market to take back its roll of setting prices.
Market corners never go on forever. They always end badly for the fixer. As such it will be a terrible omen if the sort of run of the mill cyclical crash which strikes every 5 to 6 years has become a cause for government intervention.
I do not think the Fed or the US Treasury has let its success persuade it to try and micro manage the US equity markets but if it has then woe betide America.
A Dow hitting a low in the 13000s would not be the end of the world, but newer ending rounds of QE would.
I think instead of intervention, we will see a nasty bear move up to Christmas and then we will be off again on the road towards newer market highs.
That’s how markets work 9 times out of 10 and its only in the 1 in 10 situations that government should get involved.
As such I’m short, because the market is too high, QE is coming to a half and the natural shakeout is underway.
So I am banking of the sanity of politicians and bankers.
OK so maybe I’ve miscalculated.