Saturday, 15 March 2014

Is it the Ukraine or is it Quantitative Easing?

The market looks as though it is sliding and, as ever, commentators are seeking after-the-event explanations.  Favourite is the Ukraine. But, as attentive readers know, I was sucked into that first day crash that followed the start of the Russian invasion of the Crimea. It was a one day wonder, followed by an immediate rally and a new all time high on the S&P.

We have now had a week in which the Dow has fallen by 3%, the S&P by 2%, the nasdaq by 3%, the FTSE by 4% and the DAX by 5%. Major support lines have been broken, but it has not all been one way. Most interestingly the DAX, following a major dive on Friday, recovered all the lost ground and ended the day higher than Thursday's close. This is interesting because Germany is closest to the Ukrainian action. The US/Russian talks  in London seem to have made no progress and the Crimean referendum will take place on Sunday. The result is an almost foregone conclusion in Russia's favour. So why do the Germans seem unconcerned.

This is my view, for what its worth. We are seeing the establishment of a firm border between Europe and the Russian Federation. I suspect that Russia will want Ukraine, Belarus and Moldova to fall into its sphere of influence. On the plus side they will accept that the other countries of Europe, the ones that have already joined the EU, are part of NATO or are likely to become so, will remain outside. In this way the trade ties that have been established between Europe and Russia will continue and the status quo will be unruffled by anti-authoritarian uprisings in the countries that Russia wishes to keep as its buffer states.

The US is building up its military presence in Poland to underscore the Western edge of that border. I don't think anyone is spoiling for a fight. Russia will deal with dissidents on its side of the border and the West is unlikely to interfere.

My alternative view on the market? I think it is all down to the beginning of the liquidity squeeze that is coming as QE is reduced. There will be a big shortage of cash in the market. No cash: no buyers and the inevitable crash. All that margin trading that I pointed to in my last post will have to unwind and we will have to hold onto out hats as prices spiral downwards.

My gold bet still seems to be working. It's a precarious bet and I am taking profits as they come and am ready to reverse out PDQ if my luck seems to be running out.

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