Markets are looking 'toppy' as our colleague Greg Canavan has been saying. We've had a few days of stocks falling and gold rising. That's an odd combination.
Our take is that predictions of corporate profits were overestimated in the US. Profits have had an incredible run since 2009. But analyst John Hussman keeps pointing out that profits are 'mean reverting', meaning they'll head back down to more normal levels eventually. And that implies a big drop.
If you want to know where stock markets are headed, the question you need to answer is whether stocks have been going up because of profits or money printing. Or perhaps money printing drives profits. The financial sector gets first dibs on Quantitative Easing's cash and if you take out the financial sector's frothy earnings, the S&P500's revenue has fallen for two quarters in a row, something the media calls a 'revenue recession'.
We don't know whether to blame speculation about less money printing or falling revenue for the recent weakness in stock prices. At the moment, you've got both. But what we do know is that gold doesn't earn any profits. And the gold price has been rising fast recently. For now it's not enough of a rise to reach any conclusions. But the gold price is going to be well worth watching as profits and QE continue making the news.
It's politics, not gold or stocks, that's stealing all the headlines for now. Egypt is struggling with the dangerous combination of democracy and religion, a very old problem. At least the Egyptians are polite enough to shoot at each other instead of someone else. If the violence spreads across countries, the Middle East could be in for some real strife.
Here in Australia, we are busy shooting ourselves in the foot. But at least you've got a choice of which foot you want to shoot - your left or your right. 'If Tony Abbott wins, you lose,' says the Prime Minister. Slagging your opponent is more productive than running a country if you want votes. What Kevin Rudd fails to mention is the other side of the coin. 'If I win, you also lose.' So even if your vote did swing an election, you'd get it wrong either way.
So what do you do when it comes time to vote? Be an ass and donkey vote? Draw a rude picture or vote for Warwick Capper? Find a member of the Muslim Brotherhood to beat up? Let us know at email@example.com. But remember, it's illegal not to vote and the government could be reading your emails.
Dan Denning's advice has always been to starve politicians of your efforts. In other words, pay as little attention as possible to the political system.
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