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Fed-Ensured PE Revaluations Spells Cataclysm, PM Markups?

January 3, 2016

The revaluations of price/earnings multiples will have been triggered by the long-term trend reversal in interest rates. This could have cataclysmic effects, given the unusual nature of today's environment, as outlined hereunder. 

PE valuations are more important than the actual level of the ratios, in the attempt to understand the leverage in the market, as part of the study of how quickly stocks could erupt from a bear market low, or implode after a bull cycle.

PEs presumably reflect the growth rate in earnings, but the ratios' valuations can be manipulated by abnormal phenomena, whereby that same phenomena may colour the very earnings themselves.

In this case, the most critical aspect of today's unusual phenomena is the level of interest rates, which provide the here-contemplated double whammy.

Interest rates will have ended up having a geometric effect on the leverage in the market, by affecting the artificial level of earnings and PE valuations, too.

The artificial rates level impacted earnings in what will have been an unsustainable manner, longer term.

Today, the cycle of falling rates has plainly ended, not simply because only single possible direction remained from the zero-level, but because we have actually now seen the Fed reverse the trend.

For good measure, they have done so right as the global economy continues to worsen. Hence, the denominator in the PE multiple can only deteriorate, while the ratio must rise, as well.

However, the fundamental, technical and quantitative analyses worsen amidst a background that contains a broad recognition that the long term trend must be lower, attending imminent price revaluations.

As with past markets, all the negative factors are known, while the major players position themselves to benefit from massive delta hedges that mitigate losses to a great extent, the MORE and FASTER the market falls, for the benefit of greedy banks, the savvy managers of family offices, and others.

Bulls excused historically and statistically stretched equity valuations as being the result of heretofore-unseen zero interest rates. Fed guidance some years back indicated that this would be the "new normal" for the foreseeable future, which encouraged everyone to become fully invested.

The historic level of investor participation in the market, therefore, will have had the effect of future rate increases depreciating stock prices exponentially, as opposed to "only" geometrically. Therein, the food of delta hedgers.

When there is no one left to enter a room, the only possible traffic occurs at the exit; when it is known that the traffic is uni-directional, those leaving want to get out ahead of the guy beside him, especially once good motivators for escape manifest.

This in turn means changes in the VIX level exceeding what the market experienced during the summer, when it spiked from the 13 zone to over 50 with great speed.

It is no longer any secret that this contains inordinate risk for many dealers - risk that could even spread to the too-big-to-fail community, which could even include certain global bourses.

Amidst all of this, institutions could be caused to tap into savers' and investors' pockets, with the full blessing of governments, which have already instated legislation to facilitate such desperate, but well-coordinated and long-since rehearsed policy implementation.

Technically, we are all set. One may study the 2000 - 2001 peak and rollover in the markets, which led to the waterfall into 2002.

Likewise, in 2007, that spring's peak had the bears (including me) believing that the peak had been seen in the Dow. Indices did break hard, but a fooler rally retraced to the final peak.

However, then came my second, third, and fourth and final warnings that the market had peaked and was set to crumble, in July, October and December of that year.

This time, the summer smash was again followed by a fooler-rally which kept non-insider investors from bailing, while subsequently ending 2015 on a price-positive note (in global markets, there exists no historical shortage of such yearend action).

Here, I underscore the interconnectivity of the Nikkei with the major global indices, as well as that of silver with the precious metals in general.

With the Nikkei and silver making yearend extremes for as many years back as one cares to analyse, the extremes everywhere in multiple asset classes were very likely just completed. Very likely.

In conclusion, it is hardly a wonder that multiple major multi-national banks have come out and actually all but guaranteed everyone that there will again be a major collapse in stock prices. Clearly.

When has that ever happened?

No one can accuse someone of pulling a heist, after having been warned of rocking explosions to come.

Be open, charismatic, liked by the public, then load up on silver...and delta hedges. Modern day banking!

If Jaime Dimon and his industry colleagues can make that uber-bearish guarantee, am I too brash in "guaranteeing" profoundly higher gold and silver prices?

If the bankers can make like Broadway Joe, then why can't I?


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