Thread by @Mayhem4Markets

Bull markets climb walls of worry...

They do not go straight up, they gyrate through periods of volatility. Both up and down.

What we are seeing in this young bull market is the first major challenge to it since September of 2020 (when the NASDAQ was extremely overbought).

There are no crystal balls, but from what I can see this bull market in US equities is not beginning to end, but instead it is simply the end of the beginning.

That is to say, we are graduating to the next phase.

What comes next depends on what central banks do next.

What I believe is the most likely path forward is an effort to control longer dated maturities' yields by selling shorter dated maturities to fund buying them.

This is referred to as "yield curve control", and the Fed did this when it engaged in Operation Twist.

The velocity of the longer end of the yield curve rising, and especially the 10 year bond, is creating ripples that impact over a hundred trillion dollars of various global assets both indirectly and directly.

Especially within credit and equity markets.

This velocity of selling is being driven, at least in large part, by short selling bets against bonds.

That means shorts are betting yields are going to rise (and bond prices are going down).

This bet has grown so large it is creating systemic liquidity problems.

The illiquidity in the 10 year bond market has blown out the bid ask spread, and exacerbated the scale of price movements as a result. This enhances volatility palpably.

The problem being that many bond market participants are leveraged, sometimes significantly so.

Imagine being 10x leveraged in bonds and your asset loses 3.3% of its value within the course of a week.

33% of your portfolio's liquidity has been wiped out.

So what do you do?

Well, you have to sell whatever you can.

Now take that scenario and spread around institutions.

That gives us just a taste of what's going on with the financial plumbing, and why we're seeing price discovery break down across a number of asset classes, but most especially longer dated maturities, higher beta growth stocks, and components of the commodity complex.

There are also more leveraged institutions than the example above that were 20:1 or even 30:1 that simply imploded and had to forcibly unwind entire books in to the markets over the last several weeks. We'll be hearing more about that as this whole situation is scrutinized.

So what we're seeing, to some extent, with forced liquidations and palpable panic in some areas of the market, is are select buying opportunities in distressed but high quality assets.

That doesn't mean everything that dropped is a buy. Not even close.

But there are gems.

It's a great time to have a shopping list ready when we do see a bottom put in.

My gut tells me the Fed and other central banks will be taking measures to get this situation under control.

If it worsens much from here the whole recovery will be jeopardized.