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Empty Words Are Failing. A Timeline For What Comes Next

Empty Words Are Failing. A Timeline For What Comes Next

A quick recap of the past couple of months: 

Stocks plunge.

The politicians, bureaucrats and bankers who depend on artificially-elevated financial asset prices start to panic.

The Fed announces that maybe it won’t have to raise interest rates any more, and the president announces a temporary cease-fire in the trade war with China.

The markets bounce, leading some to conclude that the worst is over and it’s time to go back to buying the dip.

A larger number of people conclude that the changes in policy were really just empty words. No actual actions had taken place.

Stocks start falling again. You are here — as this is written on Tuesday Dec 4, the Dow is down about 300 points.

What happens next?
Think of the past few months as the first act in a play that is performed in virtually every business cycle, with later acts following a predictable script. Here’s how it’s likely to go this time:

Words give way to modest action (early 2019). When the markets figure out that empty promises don’t change the underlying reality of slowing growth, falling corporate profits and rising loan defaults, they return to panic mode. Governments are then forced to actually do things to try to stop the bleeding. In the current US case, that means the Fed will announce that it’s done raising rates and will soon start cutting. Trump, meanwhile, will cut a trade deal with China that accomplishes little but removes the future uncertainty.

This will be greeted with another few days of market euphoria, followed by the realization that, again, nothing substantive has changed. Stocks will resume their decline. Let’s call this “2008 revisited.”

DJIA 2008 empty words fail

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