A Record Bear Market for A Record Expansion   

• Last week, global equity markets entered the next downleg of the bear market. In the modern age of instant communication, a month seems like eternity, but record multi-year expansions invariably involve record multi-year bear markets when they end. 
• Moreover, we suspect that "we are all Keynesians now" is not a panacea for a historic debt-deflation that will run its course irrespective of government efforts to stem the tide, at the very least regards asset values centering on stock prices. In this regard, Keynesian policies are a political, not an economic imperative.
• When bubbles that are decades in the making burst, the stock market and economy does not just go back to the starting point of the bubble, but inevitably over-correct on the downside, creating a negative spiral that central banks and governments have yet to learn how to effectively deal with.
• The USD is proving to be much more resilient than we previously assumed, but the reason is imminently negative for stocks, i.e., demand for USD is still high because of ongoing financial sector duress and deleveraging of the "shadow" banking system the very same sector that was responsible for the explosive growth of credit since the bursting of the IT bubble in 2000.
• Vikram Pandit, CEO of beleaguered Citigroup, has stated that governments have centered their efforts on bailing out the banks, whereas the credit growth that supported the US economy heretofore was securitization mediated through wholesale markets outside the formal banking system, and that world bank deposits (savings) "may" not be enough to support the credit needs of continued economic expansion. In other words, the very credit creation vehicles that are currently termed as "toxic" are essential for renewed economic growth in a credit-addicted economy.
• The conclusion is that the very act of deleveraging an over-securitized and over-leveraged shadow banking system involves a debt-deflation that by definition instigates a severe recession. Deleveraging a shadow banking system and severe recession are two sides of the same coin. You cannot have one without the other, Keynes or no Keynes.

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