This past week has seen a continuation of market volatility unlike anything witnessed over the last several years. Of course, this volatility all coincides at a time where market participants are struggling with a global economic slowdown, pressures from China, collapsing oil prices, a lack of liquidity from the Federal Reserve and the threat of rising interest rates.  It is a brew of ingredients that would have already likely toppled previous bull markets, and it is only by a hairsbreadth the current one continues to breathe.

However, as I addressed yesterday:

“Since the ‘debt ceiling debt default’ crisis in 2011, the markets have traded within a much defined bullish trend.

That trend was decisively broken this summer, and the market has yet to regain its footing. While the market ‘bulls’ expect the markets to recover and move back to all-time highs, there is also a possibility of failure that should not be ignored.”

“If the market rallies back to the bullish trend channel, and fails, it will likely lead to a continuation of the current correction.

Could the market re-establish a new bullish trend channel at a lower level? Yes. However, as discussed in Tuesday’s missive, the internal deterioration in the market is more consistent with the development of more major bull market peaks rather than just a correction within a bullish trend.  

In every market cycle throughout history, there have been times where it was vastly more beneficial to “err to the side of caution.

This is very likely one of those times.”

This weekend’s reading list is dedicated to the views on the issues surrounding the current market environment and the Fed. While it is always more fun to root for a continuation of the bull market, it is a far different matter to bet on it and be wrong. 

THE LIST

1) Monetary Policy Lags – Fed Must Act Soon by Richard Fisher via The Financial Times

“Policymakers should focus on the direction of price changes over the medium term. This is easier said than done; you cannot be certain whether the latest inflation numbers reflect a long-running trend or a passing storm. The Fed tries to get around this by focusing on “core” inflation measures that leave out food and energy prices, which are volatile in the short term. The idea is to silence the noise in the inflation numbers, while leaving the signal.

But the Fed’s favored measure does not do as good a job as it could; while less noisy than the headline inflation rate, it has also been persistently low. Over the past 10 years, looking only at data that would have been available to policymakers in real time, conventional core PCE inflation has averaged 1.65 per cent, nearly 30 basis points below headline inflation’s 1.94 per cent average. Setting policy using this measure is like navigating using a compass: it has a systematic bias and is influenced by local anomalies in the earth’s magnetic field.”