Closing Thoughts for the Week

Jerome Powell finally confirmed what the market has been pricing in for weeks, that it’s time for the Fed to begin adjusting policy conditions. If they can focus on the outlook, there’s a chance that policy conditions can catch up to what’s happening in real-time, although they don’t have a strong history of being able to do that. I think Japan and the yen are likely to be the volatility triggers again. Investors got sucked back in at the wrong time.

The markets continue to suck investors right back in as I thought/feared would happen. Some of the same issues remain though from the pre-VIX spike regime. Gold keeps pushing to new all-time highs and long-term Treasury yields continue to trend lower. Lumber prices have been stagnant. I strongly believe that the financial markets are vulnerable to another correction in the near-term.

In terms of investor sentiment, there’s a sense that “OK, that sucked, but now we’re getting back to normal.” I don’t think volatility is anywhere near done. The alarm that ignited the violent reaction in equities in the first place may have settled for now, but the underlying conditions haven’t. A lot of people have seen market volatility calm in the past few days and gone back to underestimating some of the current tail risks.