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Everyone Is Taking High Risk...Are You?


Maybe, just maybe, the slack in oil and rates is the result of a slower economy, one that is not particularly stable given its dependence on housing and capital gains.


With equity markets approaching their highs, just a few thoughts.

The liquidity being "injected" into the system is very high in front of the mid-term elections. Surprise! Just as the velocity of money is slowing rapidly (debt service is weighing on the consumer), the Fed is providing plenty of supply. I do believe that periodic monetizations are taking place to push things along. Market participants are spending the last of their cash as lower oil prices and rates make them think the consumer will get relief. But maybe, just maybe, the slack in oil and rates is the result of a slower economy, one that is not particularly stable given its dependence on housing and capital gains.

Either the inverted yield curve (the six month - ten year spread is now at an inversion of 41 basis points, a recent high) and bonds are right about deflation (recession) or stocks are right about inflation (growth). Both can't be.

But political pressures are strong. Mr. Volker just commented on that. He basically said the Fed is not doing its job right now and he is "impressed" with the level of political pressure on "them." Maybe he should comment on how "weak" they are instead.

Option prices are very very cheap as funds continue to sell them into dirt to "capture a little income." But their margin of error is very small. Now with the markets at their highs we could see upside gamma kick in: those short calls against stock are coming under pressure to either buy more stock or cover those short calls. This process could spike the market higher just at the real danger levels.

But the high stock prices in themselves illustrate high risk. At these risk levels anything could happen and the probabilities that a big move in the market are increasing. Everyone is taking high risk...are you?

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