The Catalyst Always Comes Out of Left Field

I can assure you, as someone who lived through, traded, and diligently tracked and then revisited 2008 well after the fact, that very few people in the months leading up to (i.e. BEFORE!) Lehman Brothers failing--and the subsequent fallout--were expecting just that. Sure, I could always cherry-pick 9/11 in the prior bear market but, as we know, that was the epitome of an exogenous event which orchestrated the next leg lower in that bear. 

But the lesson from Lehman, one of many, is that the catalyst in a bear market for the eventual next leg down often comes out of left field to a great many market players and observers. 

As an example, the Bank of Japan--Japan’s Central Bank--could end its yield curve control policy when it concludes its two-day monetary policy meeting this week. Doing so could easily have reverberations across global asset classes for a variety of reasons. But mostly it would signify a major Central Bank essentially capitulating on one of its grand experiments to try to control its bond market and now simply must focus on fighting inflation and regaining credibility.

Indeed, a loss of confidence by global markets in a major Central Bank is not something to be taken lightly. 

Hence, the BoJ meeting this week is not just any old foreign headline which most folks usually brush off as noise here in America. 

Put another way, and to make this blog more actionable, I see roughly 100-200 maximum points of upside risk on the S&P 500 from here, while I see 800-1200 points of downside in the coming quarters. That sort of risk/reward profile speaks for itself.

And while bulls may be pounding the table on breadth thrusts and new bull market calls, I would counter that the faction who prematurely argues for a new bull market almost always serves as fodder for the new leg down in the bear as they eventually scramble for the exits when it is finally made clear to them that we have entered a new monetary regime for the foreseeable future.