You Don't Know What This is, Do You?

Seeing as we are in the dog days of summer, where most of Wall Street's "Masters of the Universe" are off in the Hamptons, on Cape Cod, or somewhere along the Mediterranean, not to mention the Olympics taking place in Paris, it is quite noteworthy indeed to see markets dive lower to the degree they did off the open as the VIX surges. 

Put another way, it is almost a certainty that some major players of size have been caught offsides, so to speak, most likely stemming from the Bank of Japan raising rates last week and the subsequent fallout from such a move. A stronger Yen currency unwinds the "Yen Carry Trade," which likely had been behind the crowded short volatility/long Magnificent 7 and semiconductor trade, which also took a hit in recent weeks as the small caps rallied (that had been a crowded short). 

If this all sounds like a whole bunch of "leg bone connected to the hip bone" crowded trades, that is because, well, they are. 

To make matters worse the timing, again, could not have been more ominous.

Recall how consensus the view was that this summer would be one of dispersions, or a kind of rotational chop, at worst, i.e. "The Summer of George." That kind of consensus sentiment among retail, coupled with institutional crowded trades unwinding serves as an explosive backdrop for big moves across all asset classes of the disorderly kind. 

Unless there is an immediate recovery and stabilization, the calls you are hearing for The Fed to stage an emergency, inter-meeting rate cut will only grow louder and more desperate. 

However, rate cuts here in America will only likely weaken the Dollar and strengthen the Yen, thereby making this situation even worse--The more likely short-term fix would be the Bank of Japan members accepting egg on their faces and undoing last week's rate hike with a cut. But even that comes with likely serious issues. After all, they raised rates to deal with inflation, and BoJ Governor Ueda said rates would likely keep rising if economic figures kept coming in the way they had been. 

In sum, in the short-term not only have big players likely been caught asleep during the summer, but Japan's language that it is headed for a rising rates regime for the first time in decades impacts markets globally in more ways than many would seem to think.