Note Précis February 14,2018: Mortals Don’t Walk On Water: Amid capital markets flaring into higher volatility, it is worth recalling that it is normal. Central banks previously have acted as restraining forces on massive deficit financing, currently need to do so but appear too genteel. Extrapolating quantitative ease already engineered does not mean that crowding out in financial markets cannot occur. Many countries, consumers and companies are already structured on elevated debt. In the already rising cost of borrowing, yet to kick in are uncertainty premiums of the 1990s variety. With trade and politics tense, currency volatility beckons. The market abnormality has been in the accruing of major gains in myriad asset classes, including that until recently in short volatility instruments. Technical market aspects (like the recent short volatility collapse) can be more than a shot in the dark. They could presage fundamental change versus ample liquidity assumptions. This S&P 500 earnings gain phase already stretches to eight years. Instead of market share, companies cannot be oblivious to margins. Recent results show worldwide revenue competition to be severe in production, services and resources alike. At low unemployment levels in the OECD countries, labor costs could increase pressures. At current valuations, equity price volatility is likely to be far from subdued. Unlike during momentum, more risk premium gatekeeping is likely. It includes quality and diversifying such as into precious metals.
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