We all know the epic line uttered by Jack Nicholson in the movie A Few Good Men, when asked to be more forthright he screams ” You can’t handle the truth”. One might apply this same line when discussing the action in the Global Equity Markets of late. Credit markets have been tipping their hands to stocks for months, particularly the yield curve which has continued to flatten in the face of relatively strong growth. What the markets have also known about, and seem to have ignored, is the run off in the Feds balance sheet, YTD in the amount of a not insignificant $600bln. Combine this run off with the tax cut and the resultant budgetary gap and you have a credit squeeze on your hands. That new $1trillion in budgetary shortfall borrowing needs would normally have been benign in the good old days of QE, but in this new world, borrowing at the Federal level is real borrowing and constitutes competition for lending/investing. In short, the credit pool is getting tighter, irrespective of what the Fed does with the Fed Funds rate, so when you hear that the Fed is raising rates keep in mind that this statement is only partially true, The Donald lent a hand too through his unfunded and unwarranted tax cuts. The moral of this story is this however: When liquidity is rising as in 2008-2013, Capital Markets appreciate, when liquidity is falling as it is now, Capital Markets struggle.