Global markets are changing drastically and showing volatilities like we saw back in late 2008. I am not talking about stock markets, it is the debt and currency markets that are schizophrenic. Oddly, even after all of the various Western “QE’s”, liquidity suddenly looks like it is drying up. A great article as to why even the depth in the U.S. Treasury market has disappeared can be read here
Various credit markets (important one’s!) have cracked over the last month and the myth of “zero percent interest” rates is in the process of being shattered. I want to visit several topics in this piece, each one with the ability to break the derivatives chain which is exactly what we are headed for!
First and foremost, I believe we are about to find out central banks are not the omnipotent powers we’ve been led to believe. You might as well say central banks have been perceived as all powerful, all knowing and the savior of any and all things “bad”. The confidence in central bank’s abilities to fix anything and everything has grown to epic proportions and is now ingrained everywhere. This thought process is so prevalent, we might as well say it is “imprinted” in the mass psyche from birth!
What we are seeing now are credit markets revolting against the risk of over levered sovereign treasuries and the fact of receiving zero compensation for the outsized risk. Investors were led and cajoled by central banks into this corner of uncompensated risk. It was easy. Central banks led by the Fed only needed to announce their “plans” and investors stormed the credit markets in front running fashion.