It should not be forgotten that U.S. QE is over. What we are seeing in the market is in large part caused by this change. A trillion dollars a year of credit easing, asset support and indirect motorization is over.
The dollar has therefore rallied hard. Anything that amounts to being the anti-dollar has been crushed. The obvious anti-dollars are gold and oil. This is why they have slumped.
Beware narrative that personalizes market moves. People want to blame people or groups directly, but when the cause is systemic instead of using abstract explanations, finger pointing at personifications is a natural instinct. However, it’s misleading.
If you think oil has collapsed because the American government wants to punish Putin you are going to be on shaky trading ground.
If you think that oil has tanked because a sudden rush of supply of oil has met a sudden fall in demand and thereby crushed oil prices and that OPEC wants to hurt shale, then I think you will be missing the core driver.
The driver is the lack of 1 trillion dollars of QE, which means interest rates are going up, which means the dollar rises pushing down dollar commodities. The end of QE kills the carry trades in oil and all those tankers floating about as moving storage plying contango trades have to stop gumming up the futures markets and rush to port.
However, don’t worry about investment banks sitting on billion dollar losses from the collapse of oil, these days that is only the equivalent to a fine from the regulator for some historic felony.
Interest rates are going up, so debt is going down. As junk bonds collapse, it will be blamed on oil and the huge high yield bond issuance of a now hobbled oil industry. However, it will still be the end of QE and its ramifications at work.
Bonds are a huge government rigged bubble. It has been mandated and supported by QE. Interest will revert to normality and with them bond values. The question is not if, but when.
Meanwhile, the governments of the developed world will try and make the transition as smooth as possible. Japan has adjusted. It will perhaps use its QE will support asset prices. Europe will follow when Japan has done its bit.
Having said that, the U.S. has completed its trillion dollar program and nothing will be able to replace it.
So what happens next? We will get a correction. It is already underway.
The market looks a year out, so what we will experience in the market is a reflection of 2016 and that is likely to be harsh. The global economy is experiencing heavy going. We need only to look back to the QE taper to see why.
There is now going to be a period of adjustment and that is going to hit equities. Unless the Federal Bank can’t bear this adjustment there will be no QE4, so it is highly likely that 2015 will contain a significant correction, one that will be a continuation of the current bear market we are in.
We have seen the top of the stock market for now. Unless Europe like Japan decides to devalue, there will not be another surprise market rescue rally. Interest rates are going up, bonds and equities are going down.
They say you should trade what you see and what I and many people see is there is little value in the equity markets. That could all change very quickly and I believe we will soon see a move that puts back a lot of value in the market and that move will be a correction. It could be a crash.
If we don’t correct we will be heading into bubble territory and that would be truly terrifying, because another general market bubble this soon could be catastrophic.
Clem Chambers is the CEO of leading private investors Web site ADVFN.com and author of The Game in Wall Street and Letters to my Broker.
