Was that it?

Was that it?  While calling tops may not go as spectacularly wrong as trying to pick bottoms, kevlar glove-style, it can on occasion be no less painful.  Call it death by a thousand cuts rather than a decapitation- either way there is sufficient danger that it is difficult to call a definitive extreme with anything more than temerity.  (The exception, of course, is if you're in the business of being notable rather than profitable, in which case 100% confidence is a prerequisite and accuracy is of secondary if not tertiary importance.)

Under the framework sketched out last Friday, Macro Man took profits on his speculative equity longs a few days ago and went short an initial clip of SPX early yesterday.  Although Wednesday's price action was far from climactic, particularly in equity space, there was a sufficiently compelling narrative elsewhere that the odds look good for at least an interim top in stocks.

Over the last 5-6 weeks risk assets, commodities, and non-dollar currencies have bathed in the warm glow of an accommodative Fed that's been more than willing to play it cool.   Cue short-covering across all of these markets, which has surely given way to at least tactical length.  However, the change in the tone of the Fed's tune over the past several days surely has repercussions for markets, particularly in the context of recovering core inflation;  the ongoing resilience of commodities and risky assets therefore helps create upside risk for what's priced for the Fed, thus sowing the seeds of their own correction.

Gold was one of the first commodities to bottom (its rally started in earnest in mid-January), so perhaps it's telling that it's been the first to put in a top.  It's broken some sort of trendline; you could even call it a head and shoulders top if you were looking at a portrait of Richard III

While the sharp rally in crude brought some ex post fundamental justifications for the increase, in reality a large portion of the move north of $40/bbl was the unwinding of a heavily oversold condition.   Remarkably, after just a couple of days' weakness, we're already threatening the uptrend from the lows.

While there's certainly no guarantee of a move back to the lows, given the vehemence of the rally a correction back to the mid-30's is certainly possible if not likely.   Should that occur, it's difficult to escape the conclusion that based on the current trading environment equities will also sustain a deeper correction.

It seems clear, though, that CTAs are long of all this stuff:  oil, gold, copper, equities, etc.  The chart below is a stylized diagram of the signals generated from a simple CTA breakout model.  A position is established if the price (red line) breaches the high (long) or low (short) of the shaded area, which is a trailing max/min window.  Positions are partially stopped if either of the two lines are breached.  As you can see, since being at least partially short crude since late October, the model flipped long ealy this month.  At this point stops are a long way away (~34/bbl), though shorter term systems will have an itchier trigger finger.  A model with a quarter of the window length, for example, would see its first round of stops triggered at $39.12, only 50c away at the time of writing.


Frankly, Macro Man doesn't know if we've seen the top or not.  What he does know, however, is that positioning is much less conducive to continued rallies in commodities, equities, and associated assets than it was six weeks ago.  With a host of other factors tilting the same direction (more hawkish Fed, impending earnings season/buyback blackout, etc), from his perch the balance of risk continues to favor a reversal of recent trends, and he is positioning accordingly.
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Polemic
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March 24, 2016 at 7:11 AM ×

Excellent thoughts. Excellent timing.

Only of course because I totally agree as per the full post I put up last night.

Only niggle I worry about is ES positioning but as you mentioned a couple of days ago. Cash balances at funds have fallen back over the last week or so.

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Anonymous
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March 24, 2016 at 7:27 AM ×

FED hiking again? I´m not sure PBOC would agree and judging from the last 6 months of FED decision making, it seems PBOC got FED`s ear. Last 5 days CNY has weakened 1% vs USD. Admittedly still not at the 6.58/59 top but,,,,
Unless CNY strengthens in the runup to the next FED meeting I´d suspect the Chinese would like to convey a message. A message that would stop FED in its (if they have any) tracks.

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OilTr8dr
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March 24, 2016 at 8:18 AM ×

Think you're right. Though IMO the bigger move down might come in April when this perma-bid from corporate buybacks is gone

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CV
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March 24, 2016 at 8:19 AM ×

Great minds Polemic and MM! ;)

I agree, but I actually think it could be only a small pullback before a new high, just to REALLY test the conviction of the sell the rallies meme. I took off a some risk last week, mainly to alleviate the need to look at the screens on my upcoming 10-day holiday ;). It turned out to be an apt decision with a couple of single names burning holes in my performance today.

Cash on hand is the key, and it has kept me out of major trouble so far this year.

No re positioning on U.S. equities. The latest charts I have seen suggest that funds have gotten longer, but not crazily so.

1) Balanced mutual funds long again, back towards the pain territory.
2) L/S funds are long again, but macro funds have reduced exposure
3) CTA longs have recovered but could go higher, same for risk parity funds really

So, there is that then. Not extreme, but definitely enough for a little reminder that things aren't as easy as we thought it was. As LB noted, comments have been on the light side, which is a good indicator, well perhaps ;).

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Anonymous
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March 24, 2016 at 9:01 AM ×

MM. There is nothing wrong with been profitable and notable, or I doubt you would spend this amount of time blogging.
I gave you and polemic, I little nudge yesterday, and is evident in you raising the bar a little today.
By my calculations, it will take you until Wednesday for you to truly piece everything together, getting stronger each day going forward.

Don't fight it, embrace it.

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washedup
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March 24, 2016 at 10:50 AM ×

Pol/MM -while the only reasonable answer to the question 'was that it?' is 'its probably not the right question to be asking', I totally get the intellectual temptation to do so, especially now that even Pol has stopped hanging with the One Direction fans.

The tough part here is ascertaining positioning - while some fear/greed type indexes are flashing green now, given their rather cavalier correlated reliance on the level of the stock market and not much else, I highly doubt the market is by any means complacent - equities were hardly liked and respected in the last 6 weeks - more like dragged up kicking and screaming. In the big picture I feel like the market will grind down in line with earnings, but for whatever reason short positioning seems to get crowded a lot faster compared to even a few years ago, so it will probably happen in very choppy fashion replete with false dawns and hope jags. Like my first boss used to say, it is impossible to distinguish between the last leg of a bull market, and the first big short squeeze in the ensuing bear market!

And then of course, we must stay open minded to the idea that fundamentals may indeed improve, but thats more likely to take a few quarters, and its doubtful this particular election cycle will throw up sane and soothing headlines for equities. Fasten your seat belts seems more like a more appropriate idea than pressing the seat ejector.

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Anonymous
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March 24, 2016 at 10:54 AM ×

mm- given how much eps expectations have cratered in the first quarter i am amazed to see spoos here - ( no i am not perm bear but more a swing /tactical trader)....while it was nice to play the pop i am now in the short camp as well
what i am struggling with is the continued underperformace of ez equities - i thought post ecb should be very good for eu equities but still lagging spoos!!

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washedup
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March 24, 2016 at 12:22 PM ×

Macroman - congratulations on getting your own personal wall in the echo chamber…

http://www.marketwatch.com/story/why-this-stock-market-rally-is-now-looking-exhausted-2016-03-24

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Anonymous
admin
March 24, 2016 at 12:36 PM ×

Yea not good to get quoted, thats what attracts the trolls

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Anonymous
admin
March 24, 2016 at 1:10 PM ×

When people are discussing market positioning, other than the IMM CFTC data, what data are people referring to? E.g. @Polemic w.r.t. cash balances and @CV w.r.t. fund positioning.

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Anonymous
admin
March 24, 2016 at 1:23 PM ×

Anon 1.10 I think its the baml report on a survey on global fund managers re their positioning. Fat pitch blog does regular updates on it.

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CV
admin
March 24, 2016 at 4:52 PM ×

Hey Anon, or the weekly JPM F&L which I am lucky to have access to, on occasion at least

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Anonymous
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March 24, 2016 at 7:49 PM × This comment has been removed by a blog administrator.
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Anonymous
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March 24, 2016 at 10:39 PM ×

Hi, I am from Credit Suisse and I need to reduce leverage by $90 billion. Any takers here?

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Anonymous
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March 24, 2016 at 10:41 PM ×

Feb durable goods shipments (-1.1% vs -1.3%) which go into GDP are down a massive -9.2% ann. in Q1, the worst since Q2 2009 (-21.2%). Is this a bad thing or a good thing? I really can't tell these days.

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Anonymous
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March 24, 2016 at 10:46 PM ×

Killing us: U.S.-China trade gap an historic $365 billion, out-exports U.S. 4-to-1.

Hey, what just happened? and where did my job go? #americanworker

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abee crombie
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March 25, 2016 at 4:52 AM ×

Washed, I don't think equities were dragged up the past month kick and screaming. It was a massive rotation, which can be construed with risk on behavior, and if that's the case might last a while, like u suggested. Or not. It's a lot of algos and underwater HF moving the markets these days, which have short triggers when it goes wrong.... I liked the former boss quote.

is the VC party over. Biotech dead. Growthy tech looking next as already marginal software solution stocks are thrown out, as they should be. Check out fire eye

The bull case hinges on higher cyclical growth coming soon. As seen by improving industrials, and their estimates. Pmi's were a bit better but nothing special so far. I think ism is pretty big this month. Do we get a surprise who knows. Hopefully u can trade it. And in these markets that's all you need.

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Bruce in Tennessee
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March 25, 2016 at 12:17 PM ×

http://www.investors.com/politics/editorials/does-anyone-at-the-fed-know-how-to-play-the-game/

"According to a Bank of America Merrill Lynch survey, 59% of investment managers think the economic cycle is near its end — the highest since 2008. As any half-decent economist will tell you: Don’t raise rates as an economy slows. It’s a sure way to force a recession.

A confused Fed, sadly, may just make that mistake. Rather than raise rates at a time of uncertainty and sink WHAT REMAINS OF THE ECONOMY, the Fed should take this sage advice: Don’t just do something, stand there." (caps mine)

...I think what we're now seeing is a rethinking by economists in general about the good/bad effects of QE and ZIRP. I don't think the Fed members quoted who are now considering this is the time to raise rates are still thinking inside the same box. This just seems to be a "these low rates do more harm than good" type of thinking, and the April meeting may produce some surprises. The don't just do something, stand there may prevent injury to the head while it is in the sand, but that big fat part sticking up may suffer serious trauma.

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Bruce in Tennessee
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March 25, 2016 at 12:43 PM ×

http://online.wsj.com/mdc/public/page/2_3063-globalEconomicCalendar.html

Corporate profits down 3.6% Y/Y

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Booger
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March 26, 2016 at 12:42 PM ×

Abee: you were quite right, overconfidence has always been my weakness !

It would be nice to see a climactic further upswing in Spoos, oil and risk assets to set up for a good short, but maybe we won't get one. I think I will wait for another week or 2 to go short though as the move in oil doesn't feel quite done. I'd like to see $44-$48 on oil for a good level to short comm-bloc currencies with the OPEC meeting coming up.

Interesting to see NZ as the top performing developed world property market in the last year (+13%), closely followed by Australia and Canada. Which makes the RBNZ decision to cut rates recently very ballsy into what looks suspiciously like a property bubble. It also indicates macroprudential measures don't do much to prevent a property bubble, because they have put in place things like caps on property LVR's. I wonder what is driving house prices in the commodity currencies, the general consensus appears to be lower interest rates and Chinese money.

Fed: one and done, what an abomination but hey, what does that mean for the dollar ? Can the market seriously get behind the idea of a hike in April or thereafter? One suspects they are out for the rest of the year, it being an election year, so this minor move up in the dollar may not be sustained. I wonder if the dollar has further to correct out the remaining pricing for any rate cuts this year. Seems like they are talking tough here and there to maintain credibility but have are essentially happy to stand pat. In which case the DX may correct to low 90's. The next move higher in the dollar may have to wait for a risk aversion move.

The move in usd.jpy and eur.usd on CB easing earlier this year was ominous and indicates the dollar was going to get dumped anyway.

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Anonymous
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March 26, 2016 at 4:26 PM ×

Booger let me add a couple of other factors driving housing prices in the commodity producers. Having just returned to Toronto from Auckland via Vancouver, IMHO the property bubble is inflating further in these cities. In addition to lower interest rates and chinese money other factors are tax policy..no capital gains taxes on a principal residence in Australia, ditto Canada(compared to a 46% marginal rate on earned income),no capital gains tax period in NZ....and a substantial recent decline in the exchange rates of the three countries against the US$, Euro and Yuan.
Another factor in Canada (I dont know what the situation is in OZ or NZ) is the widespread use by buyers of 5 year floating rate mortgages which can currently be had at very low rates and which have added greatly to affordablity driving up prices.

When the end comes it will be something to behold...

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Anonymous
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March 26, 2016 at 5:10 PM ×

MM- thank you for your insights. I too feel the same way, and am concerned about the binary state of affairs lately - either on or off for risk assets. I started buying puts post ECB and as usual seem too early. I believe much of the China slowdown has already impacted central bank policies... but we have the credit crisis yet to hit there. Shenzhen property is up 50% in the last 6 months too... Many bad stories internally about sharply slowing economic activity. I believe risky assets are fundamentally overvalued and your points above are cogent in my opinion too. With the ECB buying corporate bonds its hard to see equities losing a bid but the market may have already discounted it. Something just doesn't sit right. Agree re gold too - I made the same observation. I believe there is a risk to see both higher rates and lower risk assets.

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Canuck Banker
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March 27, 2016 at 4:14 AM ×

Re. commodity economy housing markets: Here is my take on the psychology, in sequence:

1. Sh*t. My personal portfolio is down 30-50% because it was exclusively Canadian equities, which are overweight resources. I wish that I had put my money into something safer.

2. Go home to wife, who chimes in with "you lost all of that money on the markets. We should have just bought the bigger house/ski chalet/Muskoka cottage. Think of how much further we'd be ahead...like the Smiths down the street, who did exactly that 10 years ago, and are now sitting on huge gains. And, we would have been able to actually enjoy out investment."

3. Out of curiousity, log onto bank web site, and holy sh*t, they will lend me up to $X million dollars, based on my current income... and the money is almost free at a 2%, 5 year mortgage. [BTW: Canadians think that a 5 year fixed rate, on a 25 year amortization period is extremely risk averse. Most are floating rate, or fixed out to 1-3 years, to minimize monthly payment. Fixed rates beyond 5 years, are almost unheard of]

4. Maybe the wife is right, and we should live a little. I mean, I work at a Canadian bank, and we all know that they always make money, and no one ever gets fired from there. Plus I have all of that deferred comp (in Canadian bank shares) vesting over the next 3 years, and we all know that Canadian bank shares never go down.

5. "Darling... do you have the number for the real estate agent?"

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Booger
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March 27, 2016 at 12:06 PM ×

Anon 5:10 and Canuck Banker: it is amazing how buoyant Canadian house prices have been. One expects a housing boom after interest rates going down. Unless the downturn is due to the housing market itself as in the U.S 2008, then it is generally stimulatory for houses and there is a case for hoovering up houses when there is a stockmarket decline or TOT event that causes significantly lower interest rates. But there tends to be a significant correction with a recession, which there hasn't been in Canada yet, despite the recession, so it will be interesting what will happen there. Either it has reached a permanently higher level or it's a Wile E Coyote moment.

I live in Australia and it definitely feels like a bubble here. There is actually little talk of bubbles because so many people have prematurely called a bubble in the past. FOMA is definitely strong. Every second person it seems has an investment property and there is an abundance of TV shows about housing or house improvement. The economy seems to have successfully transitioned from resources to housing and everything housing related.

One thing I think is likely is that the cost of housing is going to feed into labour costs and unless resource prices go up in the next 2 years, the only way the comm-bloc currencies (Canada, Australia, NZ) will be able to maintain competitiveness is through a) a much lower exchange rate or b) much lower labor costs and hence probably house prices.

It will be interesting to see what happens in China. It sounds like the Chinese moneyball has moved to tier 1 cities. Will that increase resource demand sustainably? Probably not, but it might provide a further pop and very good levels to short commodities and commodity currencies from.

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Anonymous
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March 27, 2016 at 1:37 PM ×

Booger which aus state u in ? I am in melb and the chinese money flowing into the asian suburbs ia hilarious as the monied chinese always build big double story mansions with roman columns that is walled/Fences in all around.

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Canuck Banker
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March 27, 2016 at 3:25 PM ×

I don't know how you can have house prices permanently disconnected from incomes. Incomes have been flat-ish in Canada, but house prices have at least doubled. I don't have the exact numbers at hand, but that is an understatement. This has been enabled by low rates. The monthly payment has stayed constant, but because rates are so much lower, a much larger principal amount can be borrowed.

In fact, I have encountered people who don't even know that their mortgage payment is a mixed payment of principle and interest. All they know is that they need to pay $X per month to keep in good stead with the bank. They decided how much house they could afford by going to the bank, being told that they qualify for $Y of financing, and then finding a house in that price range. For the type of people who read MM, this is inconceivable, which is why it is important to stay connected to the real world, where economic actors are far from rational, but that is a side note.

So either incomes have to go up, which would require a reversal of the shift toward lower wage jurisdictions for manufacturing, and a change of direction of commodity prices (neither of which appear likely right now), or rates have to go lower, in order to fuel more growth in the price of houses. God forbid if interest rates actually go up. No one in Canada has a fixed rate for more than 5 years, and I'd guess that those people are in the minority of mortgagors in any case. That is what is going to tank the housing market here, and as someone stated above, it is going to be epic when it happens.

I have been saying this for years, and rates have been falling over that entire time. Now the BoC rates is at 50 bps. Can it go negative? Sure, but there is a lot more room on the upside than the down, if past history is any indication of future expectations.

Until the situation in the housing market is cleared, I don't see a long term path to CAD appreciation.

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washedup
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March 27, 2016 at 3:29 PM ×

Boog/anon any thts on this so called 'property bubble' could set off a virtuous cycle with property construction replacing the commodity boom? I am guessing the relative size simply isn't big enough in Canada and Australia, but why guess when I can simply ask you two!
Boog good to know you are in australia - be nice to bring up cricket every now and then on this board - feel completely outnumbered by the EPL fans.

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Anonymous
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March 27, 2016 at 3:48 PM ×

I do not know about the housing markets in AU and CAD, but isn't rising delinquency rate the first sign that a housing market is in trouble? How is the delinquency rate trending now? I could not find much data. Until you see that number moves, I think that trading on this housing bubble theme would be too early.

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Anonymous
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March 27, 2016 at 3:58 PM ×

Guys you are all badly wrong. Central Bankers & politicians are "all in". They cannot and WILL NOT let this ponzi scheme fail. If things become unhinged, then they will print even more, and finally resort to more and more extreme measures: helicopter money, a debt jubilee etc. The end game is of course MASSIVE inflation. This will wipe out all the debt (in notional terms) and the system will undergo a soft reset. Those long risk assets will see massive (notional) gains, those short equities/property etc will be utterly wiped out. Enjoy.

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Anonymous
admin
March 27, 2016 at 6:01 PM ×

Anon @3.48
You are right...it is too early . The delinquency rate here is still very low. This is because with the rapidly rising prices of recent years LVR is low and if people do get into trouble they can dump the property into a sellers market. Further mortgages are full recourse which means jingle mail isn't an option. The BOC knows the housing market is a house of cards and are very unlikely to raise rates anytime soon so when and how we arrive at the endgame is simply unknown...at least to me.

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Canuck Banker
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March 28, 2016 at 2:39 AM ×

@Anon 3:58. You might be right, but you are making a political comment, and not an economic or financial one. Central banks are created and empowered by politics, which as you know, changes with the wind. Would the existing political equilibrium, where central banks are given free reign, continue long enough for that to happen? It is certainly possible, but there is nothing (no theory, empirical evidence, or model) that allows us to do anything other than guess.

What I do know is that hyper-inflation is exceptionally rare historically, in politically functioning societies. It happens in mismanaged, centrally planned economies, or those under severe duress. To have the market scenario that you paint, where ALL markets rally uncontrollably due to central bank stoking, is another way to argue that hyperinflation will occur concurrently around the world. It has never happened before, and puts your prediction (way out) in the tail of the curve.

By the way, you are doing the conversation here a disservice by not choosing a nick name. I don't think that anyone will take you seriously, or listen to what you have to say, until you agree to be accountable for your comments by allowing them to be tracked and attributed via authorship.

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Leftback
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March 28, 2016 at 12:08 PM ×

Canada's economy is an example of a small closed system with critical connections to the outside world via a single large trade partner, that depend a lot on USD. If the dollar were to rally once more, say to DX 110, crude oil fall to $20/bbl, and US FFR were to rise even to 2%, then only the flow of hot money from China would remain to provide a source of liquidity. If that were to dry up, then the connectivity between US and Canadian economies would wreak spectacular havoc on a housing market already displaying all the ingredients for a massive meltdown.

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Eddie
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March 28, 2016 at 1:21 PM ×

Anon 3:58 missed the fact that higher inflation means that future earnings are worth less (only a few companies have pricing power to increase prices accordingly) which means lower PEs... earnings should go up fast to compensate but right now they are receding...

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