If you thought that the sudden sell-off from yesterday afternoon would reverse itself in morning trade, think again: this is looking increasingly like a secular down market rather than simply a case of high volatility. Citi’s down further this morning, a vote of confidence from one of its largest shareholders notwithstanding; Berkshire Hathway’s tumbling too; and Americans are now being laid off at the rate of more than half a million a week. Oh, and the market cap of the entire New York Times Company is now less than $1 billion, which is less than it paid for the Boston Globe in 1993.

Finally, a large chunk of the stock market is trading at the kind of distressed levels which have been implied by the bond market for a good year now. The problem is that the bond market is falling just as fast, which means that the disconnect between the two is still there: if you think that shareholders are bleeding, just look at the state of bondholders. Given that the bond market has been a good leading indicator of where the stock market is going to go, I can’t get bullish about stocks right here — especially in light of Andy Kessler’s reasons why stocks are likely to fall further over the next couple of months. And I don’t think the market has necessarily priced in the full repercussions of GM going into Chapter 7, which is increasingly likely, let alone the costs of a Citigroup bailout.

The problem is that falls of this magnitude become self-fulfilling: there’s a vicious cycle of deleveraging causing price drops which in turn cause more deleveraging, and even unlimited central bank liquidity doesn’t seem able to stop it. Paulson and Bernanke really do seem to have run out of ammunition at this point: an extra 50bp in rate cuts would barely be noticed, and the second half of Paulson’s TARP funds won’t be spent until 2009. The markets have to shake out on their own, and it’s not going to be pretty.

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