Dominoes.

It’s “disturbing”, Nancy Pelosi told reporters on Thursday, referencing the dramatic, multi-day selloff on Wall Street, where traders (both carbon-based and otherwise) seem convinced that we’re just a few months removed from living out Cormac McCarthy’s The Road.

“The market does show some fragility”, the Speaker went on to say, but urged investors not to panic.

Suffice to say there is, in fact, a sense of panic out there, although some would suggest we haven’t seen the kind of total, capitulatory purge that marks a definitive bottom.

If you go by ETF flows, though, retail investors are pretty spooked.

SPY, for example, has seen roughly $13 billion in outflows this week, the most since February 2018, during the VIX ETN extinction event, affectionately known in market circles as “Vol-pocalypse” or “Volmageddon”.

And the fear is showing up in bonds, that’s for sure.

The Treasury rally took on a life of its own over the past week or so, as growth concerns and hedging activity drove long-end yields to record lows, while expectations of policy easing showed up in the 2-year, where yields are at the lowest since November of 2016. The market is now pricing in three rate cuts this year.

“The adage ‘the prices have changed more than the facts’ almost applies to the current Treasury market move, although we remain onboard with the rally and anticipate the process of defining the lower bound for US rates will continue for several weeks as pressure mounts for the Fed to provide a policy response”, BMO’s Ian Lyngen, Ben Jeffery, and Jon Hill wrote on Thursday morning.

For her part, Christine Lagarde doesn’t think things have spiraled enough to warrant any kind of emergency ECB action. Although the central bank is monitoring the situation “very carefully”, it’s not yet at a stage where it’s expected to have a lasting impact on inflation, Lagarde told FT.

Of course, it’s not entirely clear what the ECB would do even if they wanted to roll out an emergency response. September’s package (a rate cut, the restart of net asset purchases and tiering) was generally seen as pushing the limits, and the decision to buy more assets was one of the most internally contentious moves of Mario Draghi’s tenure.

Meanwhile, the VIX hit 36.36 on Thursday, higher than the December 26, 2018 peak of 36.2. That’s a function of the rapidity of the decline in stocks, which fell some 9% in the space of just six sessions.

More importantly, it’s yet another testament to the power of the self-fulfilling liquidity-volatility-flows feedback loop. Try this:

1. Market depth dropped by an estimated 50% on Monday-Tuesday;
2. Market depth is inversely correlated to volatility, and;
3. Volatility is the toggle switch for de-leveraging

Dominoes, folks. Dominoes.