Serious illiquidity issues were unfolding a small number of trading sessions ago, as equities and fixed-income outflows – along with derivatives-related and speculative selling – began to overwhelm the marketplace. Fed assurances reversed trading dynamics. De-risking/deleveraging has, for now, given way to “risk on.” A powerful confluence of short covering and risk embracement (and leveraging) has acutely speculative markets once again perceiving liquidity abundance and unwavering central bank support.

Crisis Dynamics tend to be a process. There’s the manic phase followed by some type of shock. There’s at least a partial recovery and a return of optimism – bolstered by dovish central bankers. It’s the second major leg down when things turn more serious – for sentiment, for market dynamics and illiquidity. Disappointment turns to disenchantment and, eventually, revulsion. It’s been a long time since market participants were tested by a prolonged, grinding bear market.

Excerpts from Doug Noland’s The Perils of Inflationism Proponents proclaim a decade of central bank stimulus has proven a tremendous success. They would point first to stock, bond and asset markets more generally. I view the same markets and see… Read More ›