The market appears to now be in correction mode as the SPY is down about 6%, bonds have been falling hard as well as gold. We have written previously that this rally is overextended and due for a fall and here it is.

What we are seeing now are some of the unintended consequences of a monetary policy gone wild. The Fed encouraged investors to move out of cash and into risky assets, and now that the markets are beginning to reverse, investors are doing the opposite, with many having bought high and selling low.

We believe the market got ahead of itself due to Fed policy, but equities should still be a good investment over the long term. We think it is important that the Fed begin to taper, and in a more rational world, the sooner the better, but when market participants act like feral pigs (the words of Dallas Fed President Richard Fischer), a very slow and more even path might be preferred as investors withdraw from the drug stimulus of money printing.

The Fed’s easy money policy was necessary in 2008 and 2009, and then again when Europe was about to crash, but it was not necessary since. All kinds of investment behavior have been altered by this policy. Savers have been brutally punished and starved of income. Real estate, equity markets, and fixed income markets all have rallied a more than they should have. And now that the drug might be taken away, the markets are taking a big hit.

Hopefully the hit won’t take on a life of its own and turn into a deadly negative spiral. That again was one of the risks of this Fed’s policy. For now, we are looking for a decline of between 10 and 20%.