Earlier this month, along with our usual dire observations about an economy that has come unhinged, I noted that the world was not coming to an end. On closer inspection, I may have been wrong on that one.
One sign that all is not right in the world of investing is the increasing volatility. Volatility is not a good thing for investors seeking to limit their risk and markets recently have been as spiked as Jonestown Kool-Aid. The results could be nearly as disastrous.
As the chart shows, currency, oil and interest rates have been up, down and all around. Bonds, too, have been volatile, and price shifts have been taking place with increasing frequency.
It makes me uncomfortable when I see government bonds flash crashing along with currencies of developed markets with enormous debt levels. The Swiss National Bank’s unpegged its currency and, if Japan keeps burning yens, China is likely to unpeg its currency. When that happens, it isn’t going to be fun.
Why is this happening? Because central bankers have become the masters of the universe. Make that Masters of the Universe.
As Zerohedge notes, “For the last few years, valuations in more and more markets seem to have stopped following traditional relationships and instead followed global QE. Likewise in meetings with investors, we have been struck by how little time anyone spends discussing fundamentals these days, and how much revolves around central banks. Record-high proportions of investors think fixed income is expensive and think equities are expensive. A growing number of property market participants seem to think real estate is expensive. And yet almost all have had to remain long, as each of these markets has rallied. Could it be that central bank liquidity has forced investors to be the same way round more so than previously, and that this is making markets prone to sudden corrections?” (more…)