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Dow poised to drop 3,000 points

“When you have all this liquidity chasing a fixed number of assets the asset price inflation takes place.” That’s Komal Sri-Kumar rather neatly summarizing the cynic’s take on the last 5 years of the stock market. “It looks as if there is no end to the zero interest rates so the bubble is going to get ever bigger.”

Seems like a perfect system but for the glaring flaw Kumar says has been in place since the inception of easy money on what he calls “Lehman Day,” September 15th 2008. The Fed’s balance sheet has quintupled but the equity markets and other benefits haven’t kept pace. Nature abhors imbalances. Imagine your shins growing to twice the length of your thighs or a tree with branches thicker than the trunk and you get the basic idea of the financial abomination purists see when they look at the Fed’s balance sheet gigantism.

Of course the $4 Trillion question is how this ends when the Fed eases off the gas in October. Kumar has a guess but it’s not going to make bulls happy, particularly those who’ve started eyeballing the next Big Round Number as a target for the Dow Jones Industrial Average.

“20,000 is way too high. We are probably going to see a 2,000 or 3,000 point drop before we see Dow 20,000 years from now.”

Watch the attached clip for more of Kumar’s thoughts on the defense sectors and other assets to buy now to protect yourself from the drop he sees on the horizon.

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