Running out of options

Posted | 13/10/2014 / Views | 2560
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We’ve written many times of the things inflating the US (and other) sharemarket to record highs.  The end of last week saw large losses as a few of those inflators came home to roost.  Firstly Eurozone and Japan economies went from bad to worse.  To date these weakening economies have only really had the effect of strengthening the US dollar as their central banks ramped up monetary stimulus (increasing their debt).  That 2 of the world’s biggest economies are slowing badly prompted both the IMF and US Fed to say that world growth is slowing more than expected.   Also that strong US dollar has adversely affected US exporters.  Secondly there was the realisation that this is the month that QE3 ends and that QE has been a huge contributor to propping up these markets.  Thirdly, a little spoken of fact is that S&P 500 companies will have spent about 95% of their earnings on share buybacks and dividends – to the point that they can do little more.  Whilst great for boosting your share price it does little about future growth which is what share prices are actually supposed to reflect.  Finally, because ‘everything is fine’ the volatility index (VIX) has been at historic lows for quite some time.  Well it just shot from a 50 day moving average of about 15 to 22.   So if the Fed engineer a reduced USD (which in itself is good for gold), and major global economies continue to falter (remember Euro is just Japan before it started its record stimulus – and that didn’t work either), with QE gone the only thing left is zero interest rates, companies with very high P/E ratios out of tricks, and a market suddenly very nervous - it’s not a great set up and we may well see a flight to safe haven gold and silver.