It wasn't but a month or so ago that F_E_D speakers were almost in unison declaring their concern for the ultra-low volatility (lack of respect for market risk) permeating the markets, which is one reason many people found it shocking when Yellen said after the F_O_M_C policy decision, during her interview that she wasn't that concerned about market complacency.
Where have we heard former F_E_D chairpersons make such statements? Bernanke's, "Subprime is well under control" or maybe Alan Greenspan's "Housing prices will never go down".
In any case, we were recently reminded by none other than moderate policy dove, James Bullard (President of the St. Luis F_E_D) that the market is essentially, "WRONG" and it doesn't understand how close the F_E_D is to accomplishing its goals, read as RATE HIKE) and if that were too subtle, he suggested rates may be hiked as early as Q1 of 2015, by far the earliest estimate any F_E_D official has given, causing the market to sell-off hard on volume pre-market, to only drift back up last week in what looks to be a market induced bear flag.
Today we have the Bank of all Central Banks, the Bank for International Settlements (known as the central bank's bank) coming out in their 84th annual report.
From the FT: "
"Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally."
"The Bank for International Settlements has warned that “euphoric” financial markets have become detached from the reality of a lingering post-crisis malaise, as it called for governments to ditch policies that risk stoking unsustainable asset booms."
Also that leading central banks should not fall in to the trap of, "Raising rates too slowly or too late". (If you want to know what the market fears more than anything, it's the F_E_D raising rates, it is a bear market creator in itself).
The BIS warned of crisis' brewing in emerging markets, not the least of which included China.
"
The global economy continues to face serious challenges. Despite a pickup in growth, it has not shaken off its dependence on monetary stimulus. Monetary policy is still struggling to normalise after so many years of extraordinary accommodation. Despite the euphoria in financial markets, investment remains weak. Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions. And despite lacklustre long-term growth prospects, debt continues to rise. There is even talk of secular stagnation." Which is one of the things I've been considering more and more as inflation mounts, the economy going in to a prolonger period of stagflation, remember we are only 1 more negative GDP quarterly print away from recession right now.
"Financial markets have been exuberant over the past year, [...] dancing mainly to the tune of central bank decisions. Volatility in equity, fixed income and foreign exchange markets has sagged to historical lows. Obviously, market participants are pricing in hardly any risks." Which is dangerous considering we are at 1 of only 4 times the market has been this over-valued, the previous 3 times were 1929, 2000 and 2007 and we know how all of those years ended.
"Growth has picked up, but long-term prospects are not that bright. Financial markets are euphoric, but progress in strengthening banks’ balance sheets has been uneven and private debt keeps growing. Macroeconomic policy has little room for manoeuvre to deal with any untoward surprises that might be sprung, including a normal recession" Don't forget the April F_E_D's 1-day reverse repo at quarters end being the highest ever recorded as banks borrowed money for the very last day of the quarter from the F_E_D to make their balance sheets look stronger than they actually are, the biggest 1-day repo ever in F_E_D history on the last day of the month (reporting period).
As for monetary policy has little room to maneuver in even a "normal" recession, that's because the F_E_D has blew it's balance sheet already over the last 5 years in nearly 4 trillion dollars of expansion with assets easily purchased by creating money out of thin air, but very hard to sell without taking massive losses, thus the reason the F_E_D has no choice but to try to hold them until maturity...Meaning, the F_E_D has lost its firepower to deal with the next crisis as they've blown it all on this one to get nothing more than the worst quarterly GDP print in 5 years!
"Low corporate bond yields not only reflect expectations of a low likelihood of default and low levels of risk premia, but also contribute to the suppression of actual default rates, in that the availability of cheap credit makes it easier for troubled borrowers to refinance. The sustainability of this process will ultimately be put to the test when interest rates normalise."
"The developments in the year under review thus indicate that monetary policy had a powerful impact on the entire investment spectrum through its effect on perceived value and risk. Accommodative monetary conditions and low benchmark yields – reinforced by subdued volatility – motivated investors to take on more risk and leverage in their search for yield."
"Never before have central banks tried to push so hard." Few realize it, but just prior to the 1929 crash, the F_E_D was involved in Quantitative Easing. Japan's massive QE program has been a failure since launched and is accelerating.
"As history reminds us, there is little appetite for taking the long-term view. Few are ready to curb financial booms that make everyone feel illusively richer. Or to hold back on quick fixes for output slowdowns, even if such measures threaten to add fuel to unsustainable financial booms. Or to address balance sheet problems head-on during a bust when seemingly easier policies are on offer.The temptation to go for shortcuts is simply too strong, even if these shortcuts lead nowhere in the end." Did mommy just slap daddy at the dinner table? Calling Central Bank policies a quick sugar high fix that leads to...nowhere? Sounded that way... To my understanding, there never has been a Central Bank inflated bubble that has failed to burst... My interest in VIX futures (At the right time and place) is very much renewed.
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