By Mike Whitney

March 10, 2020 "Information Clearing House" - Last week’s violent gyrations in the stock market are the result of a tug-of-war between two well-represented groups of investors. One group thinks the Coronavirus will severely impact the global economy pushing stocks further into the red, while the other group believes the Fed will intervene in the market once more and save the day. The matter is likely to be settled as soon as next week as the drip, drip, drip of bad news continues to dampen investor expectations further intensifying the selloff.

Investors perception of the Fed’s role in fueling rallies, micromanaging the markets and providing a safety-net whenever stocks fall, has reached a critical tipping point. For the last decade, the Central Bank’s low rates, endless liquidity and frequent interventions have conditioned investors to ignore fundamentals and, instead, base their decisions on the Fed’s accommodative policy. Thus, when the Fed trims its balance sheet to reduce its cache of Mortgage-Backed Securities (MBS), investors “sell” and when the Fed provides $400 billion in low interest loans to borrowers in the repo market, investors “buy”. Coronavirus’s impact on stocks has eroded confidence in the Fed and is gradually reversing years of Pavlovian conditioning that fostered a belief in the Fed’s omnipotence. This is no small matter. When investors finally realize that the Fed has lost control of the system, stock prices are likely to fall sharply. And, with all three main indices having tripled in the last decade, there’s no telling how low prices will go.

Despite the fireworks in equities, the real action is in the bond market. It’s the bond market that is signaling no inflation, no growth, and endless economic stagnation for as far as the eye can see. That is the unwavering verdict of the benchmark 10-year US Treasury whose yields sunk to an all-time low of 0.709% just last week. What this means is that investors are so terrified, they’re willing to lend money to the government below the rate of inflation. In other words, they would rather lose money and feel like their investment is safe, than take a chance on any other bond or security. This is an expression of the unalloyed fear that is presently gripping Wall Street.

The 10-year at its current price is the equivalent of a 5-alarm fire at the heart of the global economy. It is a wailing siren warning the public that the bombs have already been dropped but not yet hit their targets. It’s also a sign of desperation regarding the country’s economic future as well as an indictment of the Fed’s abyssal mismanagement of the financial system. Bond traders have basically abandoned all hope, sold their risk-assets, and stampeded into a shelter that they hope will protect them from the approaching storm. Do I exaggerate?