re: There are some major issues lurking in the US financial markets

Didn't pare back just yet... after seeing the high open this morning. We are still getting some crazy swings on U.S.-China and Fed stories from day to day.

To recap how we got to where we are now:

#1. Powell declares we are a 'long way' from neutral ( LINK) on 10/3, and the stock market drops significantly as interest rates spike

#2. Late in October, Yellen (and to some degree, the FRB in general) sounds its concerns over leveraged lending ( LINK)

#3. By mid-November, all FAANG stocks are in a bear market ( LINK)

#4. At the 11/28 meeting, the Fed takes it a step further and warns about the possibility of a 'particularly large' drop in asset prices ( LINK)

#5. Paired with those remarks on the same day, Powell reverses course on the tone of his remarks, and says that interest rates are 'just below' neutral ( LINK)

#6. On Saturday, 12/1 (as the G20 summit is set to occur in Argentina), the Huawei CFO gets arrested in Canada at the request of U.S. authorities ( LINK)

#7. The OCC joins the FRB in warning about the leveraged loan market ( LINK)

#8. Today Yellen warns again about 'gigantic holes in the system' ( LINK)

And to top it off, last night 44 former U.S. senators (including 10 who were Republicans) sign a letter to the Washington Post warning about the country is entering a 'dangerous period'. ( LINK)

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As former members of the U.S. Senate, Democrats and Republicans, it is our shared view that we are entering a dangerous period, and we feel an obligation to speak up about serious challenges to the rule of law, the Constitution, our governing institutions and our national security.

We are on the eve of the conclusion of special counsel Robert S. Mueller III’s investigation and the House’s commencement of investigations of the president and his administration. The likely convergence of these two events will occur at a time when simmering regional conflicts and global power confrontations continue to threaten our security, economy and geopolitical stability.

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We are at an inflection point in which the foundational principles of our democracy and our national security interests are at stake, and the rule of law and the ability of our institutions to function freely and independently must be upheld.

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Interesting times.

We just concluded an ABC counter rally up at 2685

Let's see if this is the start of a big down leg to new lows. My bets say yes. Too many expecting a 2 week "Santa Rally."

I have had multiple people tell me over the past 6 years that they are professionals within the market and to get everything out as soon as possible.
I sort of welcome another “buying” opportunity we saw 8 years ago. It kinda worked out for me, and while I’ve moved some things around I am mostly convinced that the best plan is to ride these things out.

Close enough. I went ahead and halved my SPXU position this afternoon going into the Fed meeting next week.

In other news, with respect to "3. A Pivot in Monetary Policy" from that thread yesterday, I just saw this article from CNBC: " ECB announces the end of crisis-era stimulus, switches to reinvestments."

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The ECB’s governing council confirmed what policymakers had been saying since the summer. They will stop expanding quantitative easing (QE) from the end of December — when bond purchases will fall from 15 billion euros a month to zero.

It marks a historic moment for the central bank, as President Mario Draghi dismantles one of his most contentious policies.

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One thing people often forget about the tightening of monetary policy is that we have to pay attention to the major global central banks (i.e., the ECB, PBoC, and BoJ), not just the Fed.

I agree with your general sentiment, with a couple of caveats.

Yes, central banks centralize market volatility and have caused the current situation with fat and heavy left-tail risk, but I'm not convinced they exacerbate overall, through-the-cycle volatility. From 2012 to 2017 they were mostly effective in putting a lid on it. Taking a TTC view, the theory seems very possible to me that contemporary central banks tend to reduce both market volatility and the economic growth underlying market returns.

Also, markets may not need central banks in their current open-market-operations form, but I do think they need civil government institutions to manage the growth of the supply of base currency... which is a sort of "central bank" in a wider sense of the term (although in earlier centuries it might simply be called a mint). For long stretches of history, gold and silver worked as international currency standards without the need for formal state approval, but that only worked because so many different ancient kingdoms in the Near East chose to base demanded tributes or other royal revenues (even before the invention of minted coins) on gold or silver.

From earlier today, " The global stock market sell-off was ‘not an isolated event’ — expect more sharp falls next year":

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The Bank of International Settlements (BIS), an umbrella group for the world’s central banks, warned on Sunday that a normalization of monetary policy is likely to trigger a flurry of sharp sell-offs over the coming months.

“The market tensions we saw during this quarter were not an isolated event,” Claudio Borio, head of the monetary and economic department at the BIS, said in the report.

“Monetary policy normalization was bound to be challenging, especially in light of trade tensions and political uncertainty,” Borio added.

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Jerome please spare us!!

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Philosophically, why does the supply of base currency have to increase at all?

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It doesn't necessarily have to, and I was using "manage the growth" in the wide sense of including +,-, or no growth values. However, in a modern economy that can potentially generate 3-4% real GDP growth per year, you probably want to have a growing supply of base currency in order to keep consumer prices relatively stable.

This reflects my Friedmanite influences, but I would love to see managed deflation of around -1% per year on a long-term basis. From the perspective of the state, it's in the public interest to facilitate long term contracts that use the government currency as a unit of account.

Of course it's possible for free individual actors to draft contracts with clauses about inflation or commodity prices, but it's inefficient and wasteful to have to think about those things all the time, and also probably not realistic for the general populace.

Additionally, if you are in the habit of moderating consumer prices by managing the growth of currency, then you should be ready and prepared to prevent a vicious cycle from deflationary asset prices when absolutely necessary.

Got my fingers crossed for one more run with a China deal and infrastructure bill. After that, it's all cash.

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This reflects my Friedmanite influences, but I would love to see managed deflation of around -1% per year on a long-term basis. From the perspective of the state, it's in the public interest to facilitate long term contracts that use the government currency as a unit of account.

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You need a sound finite supply of money to get managed deflation. Bitcoin!