As the coronavirus continues to spread, activity in the financial markets suggests that the worst is not over.  The growing sense of unease was on full display yesterday when U.S. stocks plunged by the most since Black Monday (1987), and the markets entered a textbook bear market. 

“The 16-session plunge into a bear market is the quickest in the S&P 500’s history…”  FT

That the fastest bear market ever marks the end to the longest bull market ever is certainly noteworthy.  It shows you just how unpredictable animal spirits can be. 

This said, what wasn’t unpredictable, even 11-years ago, is that the Federal Reserve was digging a hole that it would likely never be able to get out of.  To be sure, as Bernanke and company (and then Yellen and company) used QE(s) to combat a flawed financial system the objective onlooker realized that trying to extend and pretend a shadowy-debt-driven-maniacal-marketplace was, to simplify somewhat, like throwing good money after bad.  Flash forward to today: the Fed’s balance sheet assets are still north of $4 trillion (and rising since September) and the Fed, on three separate occasions this week, announced measures to intervene further in the marketplace.  With coronavirus-related uncertainties persisting and an economic recession growing more likely, it is safe to say that supposedly emergency/temporary Fed’ purchases have become a permanent fixture in the marketplace.

“The Fed’s balance sheet in 2011 after two years of QE was $2.1 trillion. They’re doing $1.5 trillion in one shot here…The risk here is that people start to wonder why the number is so big…”  ForexLive

“These changes are being made to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.” FRBNY

While the Fed’s playbook is (for the moment) predictable, what was a little surprising is that the stock market continued falling yesterday even after the Fed acted.  It was as if panicky investors were saying they are bored with the Fed’s antics (i.e. so, the Fed is going to buy more Treasury Securities – who cares?).

It goes without saying that markets that do not adhere to the Keynesian clan at the Fed will, eventually, become enemy number one.  In other words, should asset prices fail to soon compose themselves this week’s monetary activities are likely just the warm-up of more monetary (and fiscal?) interventions in the marketplace. 

In short, with the Fed unable to reacquire much rate-cut ammo since 2009 and its balance sheet still a bloated debacle, the world awaits the next spectacular phase of global united money printing.  Gentleman, start/continue your riggings!