Originally published at: https://peakprosperity.com/market-volatility-is-sending-a-signal/
Executive Summary
In this episode, I sat down with Paul Kiker to discuss the current state of the financial markets, focusing on the volatility we’re seeing and what it might be signaling. We delved into the impact of tariffs, the role of the Federal Reserve, and the potential for a recession. I shared my skepticism about the tariff argument, noting that I haven’t seen anyone connect the dots between tariffs and company profits. Instead, I’m seeing standard late-cycle recession indicators. We also touched on the importance of understanding market cycles and the potential risks posed by derivatives.
Stock Market Volatility
The stock market is experiencing significant volatility, with indices like the S&P 500 and the German DAX showing erratic movements. This volatility is a message, and while some attribute it to tariffs, I see it more as a sign of late-cycle recession indicators. The market seems to be consolidating, waiting for news, and it’s unclear whether we’re on the verge of a rally or a downturn. The Fed’s interventionist policies have prevented normal downturns, but volatility is a natural part of market cycles.
Recession Indicators
Paul and I discussed various recession indicators, such as rising credit card and auto loan default rates, which suggest that the U.S. consumer is struggling. Despite some positive data, like durable goods orders, the overall picture is concerning. The market’s reaction to tariffs and other economic policies remains uncertain, and we must be prepared for potential downturns. The Fed’s actions, including dialing back quantitative tightening, indicate their concern about the economy’s fragility.
Derivatives and Market Risks
We explored the complex world of derivatives, highlighting the potential risks they pose to the financial system. Derivatives are often seen as insurance, but they can become problematic if a significant market event occurs. The notional amounts of derivatives are staggering, and while they are notional, they still represent a significant risk. The concentration of derivatives in major banks like JP Morgan Chase is a concern, and the potential for a market calamity if these derivatives unwind is real.
Conclusion
As we navigate these volatile markets, it’s crucial to remain informed and prepared. Understanding the strengths and weaknesses of your investment strategy is vital, as is being ready to adapt to changing conditions. While the market’s future is uncertain, being nimble and ready to respond to new information will be key. Remember, downturns are a normal part of market cycles, and they can provide opportunities for those who are prepared. Stay informed, stay flexible, and be ready to act when the time comes.