Equity markets were quietly confident that no matter what the mortgage market did, the Fed would save them in 2007. Bond markets had already got a little nervous as collateral squeezes and forced liquidations had led to a large jump in bond risk relative to equity risk - but again this was eschewed by any number of equity long-only managers and their non-money-managing partners-in-crime - the sell-side strategist - who confirmed that any dip should be bought and the increased risk in bonds was exactly the catalyst to rotate to stocks for the long-term. Fast-forward $8 trillion and five years and the patterns of bond and equity risk look awfully similar - as does the echo chamber of status quo opinion at the 'events' facing the market [4]. History may not repeat, but we suspect it will at least rhyme here...
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Chart: Bloomberg