economic data

Monday was a terrible day in the stock market. The S&P 500 had a new closing low for the year. It briefly touched a new intraday low. In my book, this is a bear market, despite the media nonsense that it's only a bear market if it's down 20%. By the time the market averages are down that much, many mutual funds and individual stocks will be down more. Would you want to sit through that?

I hope that you followed my advice earlier in the year and took your money home and let it hug you while everyone else was feeling the pain. If you have, great!

I'd accept these gifts gratefully and take advantage to lighten up big time. Bear markets typically last 18 to 30 months, and this one is just starting. I see no reason why it might be more benign than is typical.

The Wall Street–captured financial "news" media blasted us with the usual misinformation in the wake of last Friday's nonfarm payrolls report. The big guns of financial infomercialism touted the notion that the reported gain of 155,000 jobs in November "missed" economists' expectations. The consensus guesstimate was for a gain of 198,000.

Here's how a CNBC headline put it: "Job growth falls short of expectations in November: 155,000 payrolls created vs 198,000 estimate."

"Markets have high expectations for a December rate hike, but a slowdown in hiring in November appears to give Fed officials some room to slow down their hiking path next year," the outlet reported.

In the meantime, we can look at the actual data right now, make a few comparisons with years past, draw a few lines, and see reality as it currently exists without waiting five years for the seasonal adjustment process to be completed. Of course, that was the seasonally "adjusted" number, which as often as not bears no resemblance to what actually happened. The seasonally fudged number is subject to two monthly revisions, and five annual revisions thereafter as the statisticians fit the abstraction to reality over the next five years.

Bull market tops are long, drawn out processes, often lasting 18 months, give or take. But they are predictable. They happen when the central bank decides that enough is enough.

I warned in 2017 that when the Fed started talking about balance sheet reduction, the process of ending the bull market and beginning a bear market would be at hand. Indeed, the Fedheads started discussing it publicly that summer, and in September, they made it official. They began balance sheet "normalization" in October of that year.

What that meant, in short, was that the Fed would begin to – literally – pull money out of the banking system and extinguish it, month by month. The Fed published a schedule of reductions that would ratchet up from $10 billion per month in October 2017 to $50 billion per month in October 2018. 

Under Quantitative Easing, which was supposed to be an emergency program to prop up the financial system as it was collapsing during the 2007–2009 crisis, the Fed bought U.S. Treasury bills, notes, and bonds, and mortgage-backed securities directly from Primary Dealers. The Fed ballooned its total assets in its System Open Market Account from $800 billion to an insane $4.5 trillion.

That "emergency" program turned into a long-running scheme to inflate bubbles in the stock and bond markets. It lasted from late 2008 until late 2014. The Fed then undertook a program of rolling over its Treasury holdings and buying just enough MBS to keep its total assets at that inflated level.

The Fed got what it wanted: massive asset bubbles in stocks and bonds, plus an echo bubble in U.S. housing prices.

It decided that enough was enough in September 2017 and announced its program to "normalize" both the size of its balance sheet and the level of interest rates. "Normalize" was just a euphemism for shrinking the balance sheet.

I saw that as the death knell for the bull market. And now it's playing out.