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The Capital Markets Trap

Market Commentary

27 July 2017

Why is the US VIX index so low? VIX is low because investors are not selling US stocks even when they should due to excessive valuations. Why are they not selling stocks? Ironically, they are not selling because they see investments in the stock market as safer than the alternative of ploughing money into investments in the real economy. This counter-intuitive situation is a direct consequence of the enormity of the bubbles in financial markets in developed countries. Investors know that central banks will step in to support markets if the bubbles collapse, but they also know that policy makers have precious few, if any tools, at their disposal to rescue the real economy in the event of a serious economic downturn. Moreover, the fact that investments in the real economy tend to be far less liquid, even irreversible in some cases only strengthens the case for far more liquid financial assets.

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