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I am very concerned that regardless of whatever bill is passed, no matter the scope or size, it is not enough.  The OTC derivatives have already imploded, banks have already suffocated, many players and lots of liquidity forcibly removed from global equity markets.  Today’s sell off was the worst in 21 years and it’s probably not even close to the worst we’ll see in this panic.

I’ve been very bearish since late last year.  I really don’t think that many grasp just how bad it is out there.  We’re really heading off the deep end.  The potential here isn’t some multiyear lull.  It’s a decade or multi-decade long deafening silence, and that is after the panic selling has abated and the S&P 500 is in triple digits (something I’ve been calling for since late last year).  We’re looking to retrace a giant double top. Look at a decade long S&P chart.  Back to 800-850 we go, if we’re lucky.

Now, of course, the S&P 500 is priced in dollars and the dollar has seen dramatic weakness, despite the recent strength, in the last 7 years. Factor that in to the previous prices of the S&P during the dot com boom (where the highs were around 1550) and now’s prices where the dollar’s purchasing power has been dramatically reduced.  Lo and behold, we never made it back to 1550.  In fact, we’ve been in a decade long bear market so far, and now the fun part begins.  See the US dollar index chart below.

 The last inflationary bubble we saw with promiscuous real estate lending was the death throws of our bubble-based credit system.  The biggest possible bubble of all.  And now it’s burst.  The Fed and the Treasury act as though if they waste enough money they can somehow either reinflate or stablize it.   Throughout history, we’ve seen every single bubble all the way back to the Tulip mania of the 1600s, pop violently.  There is no way to do anything but provide a soft landing and even then there is tremendous moral hazard with government intervention.  As you can see below, home prices are poised to correct significantly farther down.

Given that real estate is the biggest bubble possible to inflate, we need not look farther than Japan for a model of how this may play out in the US.  Japan’s post-industrial solution to stagnant growth and deflation was to inflate the real estate market.  That ended miserably with a decade long financial crisis where many banks hid their insolvency by using accounting tricks.  Many of those companies had instruments that were tied to each other, much like we have here with all of these unmonitored highly leveraged derivatives.  Now Japan hasn’t seen growth for nearly 20 years and they’re bailing out our firms (Mitsubishi bought 20% of Morgan Stanley)?  This can’t be a good sign.