Wednesday's Market Minute: The Arms Race in Markets

Conflicting signals in markets right now are less perplexing if you picture two opposing camps piling into bets on the outcome of an expected reversal in Fed policy; one that views endless accommodation as endlessly bullish, the other as catastrophic.

One camp says the Fed will acquiescence to markets and the result will be little different than many such instances in the past; the economy and stocks continue their grind, and yields remain low ad infinitum. The other camp says such harmony will not exist. Sure, they've said this before, but this time they appear to have won over more of the market.

Gold is busting through multi-year highs and "low volatility" stocks are the new momentum trade. For some, bitcoin is the answer. The catch is, both views should be considered somewhat extreme. It’s impossible to know the exact probability of each scenario of course, but the likelihood that huge swaths of market participants are all prepared for *just* the right tail-risk event (melt up/crash down) is inherently at odds with the nature of tail-risk events. But given the ammo that each side has built up, even a moderate outcome has the likelihood of creating fairly painful episodes of mean-reversion for a few or many asset classes.

Image Sourced From Pixabay