May 29, 2014

Market turmoils and Consensus views

For over five years the Fed and other central bankers around the world have backstopped markets with nearly free money and through quantitative easing.

To some degree, central bankers' efforts have prevented natural price discovery in many asset classes, and their actions have caused investors to lower their guard, adopting something of a false sense of security that the market downside is limited. 

Fueled by new highs and easy money, market observers are now growing more optimistic. Sentiment measures are at or are approaching five-year highs.

But consensus views are often notoriously wrong-footed. As an example, find me the forecaster who called for a 2.50% yield on the 10-year U.S. note and 1905 on the S&P 500 this year, and you would have found a liar.

Over history, a Minsky moment -- that is, market turmoil following an extended period of speculation and/or unsustainable growth -- sometimes occurs when complacency sets in, as stability is often the prelude to instability.

Particularly worrisome is that we might have entered one of the great bull markets in complacency, with enthusiasm rapidly building (as it typically does in a maturing and eventually vulnerable stock market cycle). 

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