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The second is that raising rates could cause a shock to the markets and the economy as the practically free money juicing the markets comes at a more realistic cost and some government, corporate and household debts become un-serviceable.
For these reasons, Bank of America believe that the Fed is far from taking action to return the markets to normality and “the investment backdrop will likely continue to be cursed by mediocre returns, volatile trading rotation, correlation breakdowns and flash crashes.”
deal with this they advocate adding gold to one’s portfolio along with higher levels of cash. Citing factors such as liquidity, profits, technological disruption, regulation, and income inequality they say there exists a potential for a “cleansing drop in asset prices.”
The note also indicates that data shows that the stock markets in the U.S. are somewhat disconnected from reality. While investors are apparently optimistic there is a large amount of cash “on the sidelines”. Their chart shows that the high levels of cash currently in reserve actually correspond to periods of extreme pessimism in recent years.
They note the anomaly of near record high stock prices while equity funds hemorrhage cash. “U.S. equity funds have suffered $100 billion of outflows in 2015 while the S&P 500 is near all-time highs”. They put the outflow down to U.S. investors putting cash into European and Japanese equities.