Meltdown occurring according to the textbook

Meltdown occurring according to the textbook

We experienced a double dose of the runs on Tuesday on our return from the long weekend, leading to what could be described as a capitulation selling event in a race to the bottom. There was nothing unusual about the falls given that the buyers had run for cover.

There is no doubt that the Fed and our Reserve Bank have been caught napping on the job. They failed to accurately anticipate what was likely to happen, preferring to placate our fears rather than actively engaging at the front line. Now they are playing catch up. The speculation from this point is whether or not they can regain the initiative.

The fall in cryptocurrencies from > US$3 trillion to less than US$1 trillion is a step in the right direction. It is all part of washing out the excess speculative liquidity in the system that has resulted from QE and the near zero interest rates that have been the dominant feature of the last decade. The mobility of speculative funds that have been driving equity markets has been the cause of a departure from common sense and fundamental thinking. There have been many players beating their chests like heroes because they were making great money, but the reality is that they were living in fantasy land. We have taken a step back to reality with these latest falls.