If this is the new normal in the markets, then right now it looks as bad as the old exceptional. A big part of the turmoil is caused by the realization that central banks are finally winding down their asset purchases and, for the first time in a decade, are prepared to leave market participants pretty much on their own.
The problem is that nobody knows how much central bank-generated hot air still needs to come out of asset prices before they find their "new normal" valuations. Perhaps there are still some investors holding out for another round of intervention like in 2013, when then Fed chair Ben Bernanke had to row back on slightly hawkish remarks about tapering asset purchases to halt a rout in the markets.
This time, central banks seem happy to dig their heels in, if only to see how much pain the markets can bear. On Thursday, the Bank of England sent a more hawkish message than many investors had expected, forcing some to bring forward their expectations for a further rate hike. But real interest rates in the U.K. are still negative, so monetary conditions remain extraordinarily easy for the moment.
So far, the Fed chair has remained quiet (good for him), but he is probably watching very closely investors trying to find their feet in the new environment. As the selloff deepens, pressure is mounting on Jay Powell to say or do something.
On Thursday, an article published on the CBS website talked about the Fed's "ominous" silence in the headline, wondering in the first sentence: "Where is the Powell put?"
But this is exactly the problem that central banks probably hope the current correction will solve: investors have become too reliant on monetary policy support, to the point where one-way bets were the norm. They need to stop doing that, and if that means over-reacting to the downside for a while, then so be it -- the economy is strong enough to withstand some stock market volatility this time around.
U.S. equities funds saw $34 billion in outflows in the five trading days to Wednesday, according to EPFR data quoted by the Financial Times. Stock funds holding developed European countries' equities saw $3.4 billion in withdrawals, while foreign investors redeemed $7.7 billion from funds holding stocks in Asia Pacific.
To use a bad metaphor, the markets and central banks are now staring at each other across a sea of red. Whoever blinks first will decide whether we go back to normal or remain in the fantasy land of central bank-backed rallies.
On a different note, today is my last day writing for Real Money. Thank you for reading my columns, and for your feedback and support during these three-plus years. It has been a privilege working here. Those of you who want to stay in touch can contact me via the contact page of my website, www.marketmoving.info.