Here It Comes (You Were Just Warned Folks)

Karl Denninger
The Market Ticker
Thursday, January 7, 2010

I don’t know how much clear it gets than this:

By Scott Lanman and Craig Torres
Jan. 7 (Bloomberg) — U.S. regulators including the Federal
Reserve warned banks to guard against possible losses from an
end to low interest rates and reduce exposure or raise capital
if needed.

“In the current environment of historically low short-term
interest rates, it is important for institutions to have robust
processes for measuring and, where necessary, mitigating their
exposure to potential increases in interest rates,” the Federal
Financial Institutions Examination Council, which includes the
Fed, Federal Deposit Insurance Corp. and other agencies, said in
a statement today.

Let me point out a few things.

1. We have never seen a crash and rebound in US stock market history like what we have just experienced, except once. That “once” was 1929/1930. What followed next was a grueling grind – not a crash, but a grind that never ended, and in which the market lost more than 80% of it’s value. Those who argue “the bigger the dive the bigger the bounce” forget that the only true comparison against what we have just seen was in fact the prelude to a grinding 90%+ overall decline.

2. If you believe in “long wave” cycles – that is, Kondratieff cycles, we have precisely followed the several-hundred-year long pattern though its latest incarnation, with the 1982-2000ish period being “Autumn.” Winter follows fall. These cycles seem to happen mostly because all (or essentially all) of the people who lived through the last cycle’s horrors are dead. Unless we have found a way to break a cycle that has endured far longer than our nation, we’re right where we should be – which incidentally aligns with what happened in 1929/30 as well. This means that while there may be ups and downs we have not bottomed – not by a long shot – no matter what people tell you.

3. Interest rates can only go up from zero. That should be obvious. Rising rates are not positive for equities and multiple expansion.

The article continues at The Market Ticker.

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