Most market participants have been surprised by the last six months. The total return of the US Treasury Index was the worst since 1788 according to Deutsche Bank. Stocks closed June with one of the largest corrections since 2008. Bonds and equities are falling in unison, driven by rate hikes and normalization of monetary policy.

However, there is no such real normalization. The balance sheet of the main central banks has barely moved and remains at all-time highs according to Bloomberg. The ECB continues to ignore the highest inflation rate in the eurozone since the early 90s by keeping negative rates. The Federal Reserve rate hikes have been more aggressive, but it is still injecting billions of dollars in the reverse repo market and monetary aggregates remain excessive.

Governments love inflation. It is a hidden tax on everyone and a transfer of wealth from bank deposits and real wages to indebted governments that collect more receipts via higher indirect taxes and devalue their debts. That is why we cannot expect governments to take decisive action on inflation.

To curb inflation effectively, interest rates must rise to a neutral level relative to inflation, to reduce the excessive increase in credit and new money from negative real rates. Additionally, central banks must end the repurchase of bonds, exchange traded funds and mortgage-backed securities as this would immediately reduce the quantity of currency in circulation. Finally, and most important of all, governments need to cut deficit spending which is ultimately financed by more debt and monetized with newly created central bank reserves. These three measures are crucial. One or two would not be enough.

The most common question among investors these days is when to buy the dip. Very few market participants seem to be worried about a crisis or deep recession, let alone a nuclear threat.

However, those three scenarios are not unimaginable. In its Global Data Watch of June 17, JP Morgan says that its internal model only shows a 25% chance of recession in the next year. Furthermore, they clarify that the likelihood would rise to 40% if credit conditions were updated.

Still low, right? We must remember that in January 2008 Reuters reported that “expectations for the weakest consumer spending performance in 17 years during 2008 kept the odds of a recession at nearly 40 percent”.

For years we have read that it was important for the Federal Reserve and the major central banks to push the limits of monetary policy to boost growth and jobs. Monetary policy stood at the forefront of all recovery plans. In 2008, quantitative easing seemed enormous, but the subsequent incremental plans have made that stimulus package virtually irrelevant.

Since 2008 each new government spending plan had to be larger. If it was not at least a couple of trillion dollars, it did not even make the headlines. As for monetary policy, limits were surpassed almost every five years. Negative real and even nominal rates, trillions of new money supply, and different purchase programs that included private debt and even, in the case of Japan, exchange traded funds (ETFs).