Closing Thoughts for the Week

The scenario I predicted is now playing out in real time and the results have been incredibly damaging to those not prepared for it. It’s quite clear that the economy is slowing down. What had been looking like a rotation within equities for the past few weeks looked very much like a flight to safety trade on Friday. The Fed made another policy mistake. Don’t be surprised if there’s some type of central bank manual intervention that results in a sharp reversal higher.

Small-caps are nearly three weeks into this trend and they still aren’t showing signs of abating. I don’t think it’s a coincidence that mega-cap tech is cratering just as the yen is rallying. I’ve talked repeatedly about the risk of the reverse yen carry trade and I think we’re seeing that play out in real time. We very well may be in the early stages of seeing a meaningful regime change here.

While the small-cap rally cooled off towards the end of last week, the theme of rotation away from the magnificent 7 stocks remains intact. Is this rotation sustainable? Once the initial fear wears off, we could see a reversion back to tech and away from the current leaders. The one thing that gives me at least a little conviction in this idea is the fact that Treasuries are not really moving.