Jim Hawthorne

This Bear Market is Worse Than I Thought

You say, "The Fed is throwing the kitchen sink at this market and the market is speaking loudly; the Fed is too late." It seems that many of us simply take it for granted that it is the Fed's job to "save" the market. This is not quite the case.

Today, the Fed's stated mission and mandate is: "The purpose of the Federal Reserve System originally focused on lending banks money to ensure that they would have sufficient cash in times of seasonal shortages and incipient panics as well as to provide currency to the banking system. The Fed also was to supervise state-chartered banks to maintain their stability and compliance with the federal banking laws. But, as the financial industry and the economy evolved and developed, the scope of the Federal Reserve's mission also expanded. Today, the Federal Reserve System has three distinct functions: supervising banks, including bank holding companies, many state-chartered banks, and international banks; running huge payments systems that involve processing checks and transferring funds electronically; and monitoring and adjusting monetary policy to guard the economy against high inflation and recession."

It is true that the policies of the Greenspan Fed encouraged us to feed the bubble that has just burst like a super nova through the cheap supply of money coupled with loose lending standards, shoddy oversight of the banks and keeping interest rates too low for too long. It is not true that the Fed has a mandate to save us from ourselves.

What is happening is the deflation of a truly financialised system built on paper debt with precious little real support, and we were all too willing to belly up to the bar and play the game.

While historical looks backward at the 2000 through 2002 bear market are useful (see the bottoming process that went of from July 2002 through March 2003, for example), conditions then were quite different in terms of inflation, consumption, overvaluation and growth.

While we will see series of "pop and drop" rallies, these will be opportunities for only the most disciplined, flexible and nimble traders. We are witnessing the destruction of markets, and I agree that the consolidation, healing and recovery of those markets will be a long, slow bottoming process, and that there is still more pain to come.