QE Lives? Bank Manipulation Library. Risk Management.

November 14, 2014

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It turns out that QE did not really end last month. Only officially. It is more than likely that the big banks are now operating a “shadow QE”. So much for policy transparency, accountability, etc.. It is becoming harder than ever to draw any line between the Federal Reserve and the big banks.

Just one week in October showed what would happen if QE was really abandoned as has been well described by Richard Duncan’s analysis. The banking system “can not abide” this. The article below by Nomi Prins does a great job of summarizing how failed policies are now morphing into the surreal: http://www.nomiprins.com/thoughts/2014/11/10/qe-isnt-dying-its-morphing.html

Assuming this to be the case we have now lost our last working correlation with the S&P 500. Here are 15 charts in a desperate attempt to find some link between the S&P 500 and something else: http://www.zerohedge.com/news/2014-11-11/just-15-wtf-charts

The last man standing was the Fed balance sheet, but apparently that no longer matters anymore. Perhaps someone will come up with some big bank balance sheet metric that will have a good S&P 500 correlation. Until then we are apparently flying blind. It is unlikely that the banking system will be interested in enabling anyone to front run their trading activities.

The bank’s market activities have become legendary and pervasive already. It has become hard to keep up. Just this week there were new revelations. For anyone who is attempting to keep the score here is the bank manipulation library: http://www.zerohedge.com/news/2014-11-12/big-banks-busted-massively-manipulating-foreign-exchange-precious-metals-%E2%80%A6-and-every

With the markets back under control volatility has once again collapsed, at least for now. However, investors need to be aware that risk has probably never been greater. The S&P 500 is clearly at peak valuations compared to any other period over the last century and is clearly the most expensive equity market in the world and now with steep declines in earnings estimates: http://www.zerohedge.com/news/2014-11-13/its-official-us-worlds-most-expensive-stock-market

Perhaps, none of that matters any more. Banks can print money at will. Their power and discretion has never been greater. Not printing would lead to a loss of control, why would they choose that option?

This leaves investors in a new realm of decision theory. Enormous risk and uncertainty and yet increasingly opaque policy guidance.

Any investor who is not managing risk in this environment is gambling as never before. For the time being there is little if any objective rationale on which to calculate an ideal equity allocation.

Powerful trends continue for now, but unless you believe that printing money can continue forever, ultimately the All Weather (AW) allocation will reassert its natural and resilient fundamental structure. By combining Adaptive Allocation with the AW methodology it is possible to respect current trends while also staying aligned with the highly resilient and durable AW framework. Just because decision theory has become problematic does not mean that there isn’t a workable solution.

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