A Wounded Federal Reserve, a Lehman Era Tool Box sits on the Shelf

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“Our indicators tell us, we’re very close to a Lehman-like drawdown,” argues Larry McDonald, a former strategist at Société Générale who now runs The Bear Traps report.

Financial Times, February 20, 2020

In September and October of 2008, the Federal Reserve showed the beast inside the market their body armor.  With a newly minted – creative toolbox, they stood tall and stared down a large group of short-sellers in what was the most prolific “bear raid” since 1929.

In a strong bull market a larger and larger group of participants “buy the dip” taking stocks to places oftentimes they shouldn’t go.  In a ferocious bear, short-sellers pound overnight futures in an effort to shake the confidence of investors. As stops (stop losses) are triggered – a larger and larger collection of long term investors get placed on the sidelines, confidence is lost and some investors won’t return to stocks for years to come.

LQD Investment Grade Bond ETF

Some would say,  global central bank’s multi-trillion-dollar asset purchases in recent years sowed the seeds of this financial crisis. In early 2020, nearly every asset class was dramatically mispriced relative to encroaching risks. Now losses are in the trillions and we’re handing over more power to the enablers? Unfortunately yes, they hold all the cards.