I hope everyone is having a good weekend. Friday was a bloodbath after the tariff escalation. I am seeing deep anger and confusion on social media. Of course this is not representative of investors as a whole, but the younger generation is levered to crypto and altcoins, and those all got demolished and there were exchange liquidations. Leverage can be a blessing and a curse and needs to be used responsibly. The type of action we saw Friday is what happens in a bubble. We get excessive risk taking and that leads to situations where something can derail that and the leverage that was accumulated on the way up gets called instantly on the way down.
Everyone is aware of the 1998 LTCM SPX drawdown. People are less familiar with the June 1999 7% and December 1999 7% drawdowns. The risk builds before the bubble collapses.
I blame the Fed for irresponsible monetary policy while ignoring risk taking in markets. It’s been building since 2023 and Friday hammers home how big an impact an equity drawdown can have if it is large enough.
So the question for this week is, is this going to morph into a larger VAR shock, or not?
Let’s explore.