Thursday, 30 October 2014


Or 'at last' as we say in English. Yesterday came the announcement that QE in the US is to be retired. The market took the news in its stride since it was well anticipated.

The announcement came with the promise that interest rates would remain low. This was designed to avoid panic as the tap pouring out cheap money was turned off.

There was, however, a change in the FOMC's view of another important indicator. They said that "underutilisation of labour resources is gradually diminishing". This is code for "there may soon be a shortage of labour and wages may begin to rise". So what we have here is the first admission that the specter of inflation may be poised to reappear.

At present the commodity markets are benign. Oil prices in particular are low. In a list of unleveraged commodity exchange traded funds (ETFs) only 16 out of 70 are up on a year ago and of those 6 are concentrated on the livestock industry. Others that have risen include coffee, zinc, cocoa and nickel. The big losers include sugar, wheat, other grains, precious metals and most importantly of all oil and its derivatives. The low prices of these important staples means that we are currently living abnormally cheaply. Any change in this benign situation, together with potential wage inflation could lead to inflation, a rise in interest rates and that would be the end of our bull market for sure.

All credit must be given to the central bankers for inventing QE. As a method of keeping a financial system, that had driven itself onto the rocks, from sinking beneath the waves it has performed superbly. Naysayers, and I include myself, have been proved wrong. The system did work and the UK which used the same strategy now has one of the healthiest economies in the West. The Euro Zone is embarking on its own version of QE.

We still don't know if the world economy will survive without the crutch of QE which transferred such huge sums of money from the state sector to private businesses and pushed the stock market to record levels. What we can be sure of is that the flow of money which found its way into the world's market has now been switched off. The supply/demand balance has been changed: no new money no new demand.

From now on we must listen even more carefully to statements by the World's central banks to see what they plan to do to keep the vehicle on the road.

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