Behold "The Great Complacency"

Authored by Thorsten Polleit via Mises Canada,

Perhaps, one of the most striking features of current financial market price action is the conspicuous absence of investor risk concern. Stock market price volatility, for instance, has bottomed out on the lowest level since the early 1990s. At the same time, stock prices have reached all-time highs, and the valuation level has gone up substantially (with, say, the PE ratio standing now well above its long-term average). Investors are apparently quite confident that corporate earnings will continue to go up and a stock price correction is nowhere near.

Is it because we have finally left the worldwide economic and financial crisis behind us? Well, there are quite a few reasons to express some doubt. For example, total debt levels have not come down since the 2008/2009 crisis – on the contrary, they have grown further. At the end of 2007, global debt (public and private non-financial sector) stood at 212% of the world GDP, according to data provided by the Bank for International Settlement. By the end of 2016, the global debt-to-GDP ratio stood at 265%. So, what could be the reason that has put investor risk concern to rest?

Central banks come to mind because not only have they beat interest rates down to hitherto unseen low levels. They have also created a ‘safety net’ – not officially, but through the very policies they have implemented in the last decade. Investors have noticed – and expect central banks to stand ready to fend off any adverse developments in the real economy and financial markets again should it become necessary.

Having little to fear in terms of systemic risks, investors feel encouraged to engage in risky investments:  investments they would not be making if central banks hadn’t put out a safety net.

As investors expect interest rates to remain suppressed or even be lowered further, if and when the economy or financial markets get hit by an adverse shock, asset prices keep going up, and lenders happily continue extending new loans. Consumption and investment are expanding, indeed suggesting that the recovery is growing stronger. However, the safety net provided by central banks is distorting interest rates, financial asset prices, and the cost of capital significantly.

As long as the safety net remains in place, we can assume that the effectiveness of central bank actions (such as, e.g. increasing short-term interest rates and unwinding bond purchases) is greatly diminished, because market agents have little reason to expect a final exit from the excessively loose monetary policy if such an attempted exit jeopardized the strengthening recovery and asset price inflation.

With the ignorance and under-pricing of risk – in the credit as well as the equity markets – central banks have orchestrated something that might best be referred to as “the great complacency”. They have created the illusion of stability and returning prosperity. To prevent the painful awakening, central banks keep interest rates and the cost of capital low and to fight any new trouble in the economic and financial system with an even looser monetary policy.

The political attempt in preventing yet another credit crisis – in which borrowers default on their payment obligations and the economy and financial markets nosedive – paves the way towards an increasingly inflationary environment. The relentless rise in asset prices, be it stock or housing prices, unmistakably shows how dependent the economic and financial system has become already – a dependence that will only get greater in times of “The Great Complacency” brought about by central banks.


Crisismode LawsofPhysics Thu, 11/02/2017 - 10:40 Permalink

Everybody knows that the dice are loaded Everybody rolls with their fingers crossed Everybody knows that the war is over Everybody knows the good guys lost Everybody knows the fight was fixed The poor stay poor, the rich get rich That's how it goes Everybody knows Everybody knows that the boat is leaking Everybody knows that the captain lied Everybody got this broken feeling Like their father or their dog just died-- Leonard Cohen

In reply to by LawsofPhysics

LawsofPhysics Thu, 11/02/2017 - 10:34 Permalink

So fucking what?Are you still accepting fiat currency in exchange for the product of your labor? Yes?NOTHING will change asshat."Full Faith and Credit"same as it ever was...

Herdee Thu, 11/02/2017 - 10:47 Permalink

It's all governed by the debt of the federal government and the unfunded liabilities. Next, you go down the ladder to State, City, County, Pension Funds etc. Reality is, not just inflation but hyperinflation. Either that or go into a deep depression and wash out all the debt and screw the stock market and the bond market too. You know the easy path that politicians will pick because interest rates cannot normalize. That's bullshit because the federal government is out of control with their spending and tax revenues are falling.

Winston Churchill Herdee Thu, 11/02/2017 - 11:05 Permalink

Its all being funded out by the exchange rate stabilization fund.No way we can know exactly how muchis in that fund. but we can make educated guesses from what we know about how much other visibleplayer put into the pot.Not as big as a lot think, but as a buyer at the margin,its enough so far.The problem comes when there is a panic for the exits.I don't think it can handle a real crisis again,because its success uptil now, has been the setup for its failure.

In reply to by Herdee

To Infinity An… Thu, 11/02/2017 - 10:50 Permalink

In 2008 a decision was made to rescue bankers (rather than imprison them).This decision will go down as one of the most destructive in world history.The aftershocks are now coming into play.It will descend into total chaos before it gets better.Buckle up and good luck.

LawsofPhysics To Infinity An… Thu, 11/02/2017 - 10:53 Permalink

Correct.  If you are really going to print money and put it on ALL taxpayer's backs, then the ONLY way to do that EQUITABLY is to give EVERYONE the same amount of freshly printed fiat!!Give more free money to the same BAD actors only makes things worse!!!!No matter, such "let the majority eat cake" monetary experiments have been tried before. This one will end no differently, but the numbers and consequences will be exponentially greater.In the meantime..."Full Faith and Credit"

In reply to by To Infinity An…

lew1024 CJgipper Thu, 11/02/2017 - 16:15 Permalink

Anyone who reads ZH for a few months can cite half a dozen first-order and large connections between the financial markets and mainstreat economies, e.g the end of the housing bubble will put all the builders and tradesman out of work. Collapse of land prices will end investment in farm businesses, as stored grain supplies are already high and grain prices low and banks loaning to agribusiness will pull back to avoid risk. Collapse of auto sales due to suddenly-higher interest rates, end of leases not renewed, every job lost produces unwinding and lowered purchases.  Add in repossessions, financial collapse affects people in all those businesses, mostly negative.Financial collapses are hard on banks, some of which will collapse themselves. When money doesn't move, goods can't, another bit of contagion.Really, consider the coming financial collapse as the latest check of the links between financialized-everything and main street economy. The financial system has allowed every element and individual to take on debt. Debt is risk, people start losing immediately when any element in the vastly complex evolving system of the economy has a problem, and the tight connections make ripples fast and pervasive.Owing or owning debt puts you into a Just In Time manufacturing paradigm, any supplier/debtor misses the shipment/payment, you have problems. Savings == buffer stocks, a powerful way of avoiding such issues. 'Adequate buffer stocks' is another way of saying 'prepping for hickups in the supply chain' in the manufacturing world, or hedging in the financial.Too powerful government has made this mess and continues to paper it over, but all they can do is delay and make the mess worse, the fall harder.Meanwhile, just to remind you of the real risks, the CIA continues to take over the country, and nobody is very excited about that.  

In reply to by CJgipper