The hammer blow that triggered this rout

The question now is, how much damage must be done before the Fed signals a setback, as it did in early 2016 when the scare of the Chinese currency became out of control and it became more difficult There was a demonstrable "backtracking" in the US economy. When does the proverbial "Fed puts" – what are the markets calling for a rate cut to save the economy – come into play? The answer is not yet.

"The Fed will stick to its weapons"

"The" Fed "is a thousand miles away," said Michael Darda, US monetary expert at MKM Partners. Its Fed tracking model estimates that it would require a 150 basis point increase in high quality credit spreads and 300 points for speculative bonds. Nothing less attracted Mr. Powell's attention.

Until now, these spreads have hardly moved. The indicator preferred by the Fed – the adjusted spread according to the options of High Yield Master II – has only increased by 39 points. He rose 284 points during the Chinese fright.

Geoffrey Yu, of UBS, said that the Fed would be happy to see a small disciplinary anguish to introduce to the markets. "With [US] With wage growth well above 3%, the Fed will stick to its weapons, "he said.

If it were the kind of crisis that alarmed the central bankers, it would be a flight to safe haven assets: the Japanese yen or the 10-year US Treasury bond. Nothing like it has happened yet.

Trump whiskey shot

The Fed is more worried about the unfortunate "whiskey hit" of Donald Trump's budget blitz.

The unemployment rate of the world's largest economy is already at 3.7%, its lowest level in half a century. Additional spending and tax cuts at this advanced stage of the cycle – with capacity constraints everywhere – go directly to inflationary pressures. Infrastructure projects strike at the worst moment.

It is remarkable that the last time the unemployment rate in the United States was below 4% (in 2000), the US federal budget was in surplus in the order of 2% of GDP. Today, the deficit is 5%. Rightly or wrongly, the Fed is convinced that it must curb to offset this epic misalignment.

A parallel monetary tragedy is underway in Europe, where the ECB is gradually reducing its stimulus measures. This has powerful side effects around the world. Marchel Alexandrovich, of Jefferies, said that 50% of all QE bond purchases under Mario Draghi have been recycled overseas.

"This has put downward pressure on global rates, with spillover effects on US credit, gilts and emerging markets," he said. "So we are now looking at a big change in global financial conditions."

Amounts of money blink orange

The ECB is taking risks by ending stimulus measures even as the economy has slowed sharply. The composite PMI indicator for manufacturing and services in the euro area fell to 52.9%, its lowest level in two years, in September. The Bundesbank said German growth stagnated in the third quarter. Italy is close to zero.

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The defense of the ECB is that the stock of quantitative easing remains huge at 2.7 trillion euros, even though the flow is being disabled. Yet the money supply data is flashing orange. According to Janus Henderson's Simon Ward, its key indicator – the actual six-month M1, or all the outstanding banknotes and coins – points to a slow economic growth of 0.25% per quarter, half of the ECB's forecast .

Professor Tim Congdon, of the Institute for International Monetary Research, said that the broader M3 money numbers – which describe the broadest measure of the total money supply of an economy – have already slowed significantly as the ECB clears and becomes a threat: turns to 2019. When they stop making QE, it will reduce M3 [money supply] growth at only 1 or 2%. This may cause a recession. "

In the eye of the "perfect storm"

A recession in the euro zone would be catastrophic in the current circumstances. Interest rates are already below 0.4%, making any emergency reduction impossible. Eurozone fiscal rules prevent radical fiscal stimulus. With core inflation still stuck at 0.9%, the economic contraction would push the bloc into a deflation trap. Ashoka Mody, former head of the International Monetary Fund in Europe, said the next recession would plunge Italy into a "perfect storm", disrupting the debt dynamics and exposing the unresolved pathologies of monetary union. European.

Professor Mody's book – EuroTragedy: A Drama in Nine Acts – says the ECB may be powerless to prevent the outbreak of an Italian crisis. His hands are bound by political constraints. This could push the global economy to the brink.

Italy is clearly one of the growing concerns that undermine market confidence, as well as Trumpian's trade wars, the slowdown in China and the treatment of Brexit by both parties. The European and Wall Street stock markets could experience a mechanical rebound in the coming weeks without any help from the Fed and the ECB, although technical experts say that it could take a further 6 % of the S & P 500 index to reach levels close to 2500 before the storm passes.

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At this point, it becomes a salivating purchase for institutional funds. Bank of America said its liquidity was 5.1%, well above the 4.5% average. The reflex "buy-the-dip" remains strong. US earnings may have peaked after a 25% rise in the past year, but optimists say this does not in itself mean a pullback. Stocks often stabilize and then rise slowly for a moment when this happens.

However, historical models may not be very useful in this new world. QE never took place on this scale and Fed staff are split on what will happen in reverse. Nobody knows what the recommended dosage may be. Central banks have long argued that stimulus measures worked by inflating asset prices; the opposite must therefore be true to a certain extent.

This tightening occurs in a world where debt ratios are 40% higher than at the pre-Lehman summit, and at a time when China is struggling to de-leverage its credit bubble and is no longer able to manage today's stimulus plans.

Above all, central banks make mistakes. Cycles usually end in recessions, as rate-setting people misinterpreted turning points. They keep squeezing each other until something breaks. In 2008, they were misled by late indicators of the labor market and inflation and paid little attention to the forecast warnings of the M3 money supply.

The effects of the tightening of central banks will not be felt until the beginning of 2019 … This is how global recessions occur.

They may be doing exactly the same thing today. They are mechanically advancing in their preprogrammed schedule, even though global surveys on the Purchasing Managers Index have softened since February. The weighted tracking of Nowcast's global growth of 3.4% in the second quarter was 2.4% in the third quarter over the same period. Japan has gone from growth to contraction.

The Nowcast indicator went from 4.2% to 2.3% even in the United States, despite Trump's optimal fiscal stimulus. Home sales and car registrations have withered. This has disturbing implications for next year, as the sugar rush in the White House fades.

The effects of the tightening of central banks today will only be felt towards the beginning of 2019. By that time, we may already be in the throes of an economic slowdown. That's how global recessions happen.

The Daily Telegraph, London