SPDR S&P 500 (SPY)

[tw0122]

So why are retail investors betting that VIX will crash from its lofty 30+ levels.

Because they are certain that should things get worse, the Fed will once again step in and stabilize markets, which as we explained earlier, could be a fatal gamble this time around.

And as a result, the Fed is again trapped: if the selloff continues - or accelerates - next week will face a lose-lose dilemma - bail out retail (and institutional) vol sellers, and while preventing trillions in losses, lose all credibility and confirm that the "coordinated recovery and strong economy" narrative was a lie all along, while derailing what is likely the last tightening cycle; or allow normalization to take place, and watch as trillions vaporize from the Fed's artificial "wealth effect."

We wish Jay Powell the best of luck as he faces the most critical question of his career just days into his tenure as the Fed's new chair, and wish to remind him of what he said at the October 2012 FOMC meeting:

I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy