This is a liquidity driven, risk-on rally, that has plenty of underlying fault-lines which will occasionally trip up sentiment. But the underlying directional pull for stocks and risk assets generally in this cycle is undeniably risk-on now. We are back to bubble economics and the super-accelerant added by the central banks is the propellant that will take this rally back above the upper hemi-sphere in the coming years. The tail risks of the Eurozone and the US fiscal cliff are still there but they have receded considerably in recent weeks. The Fed is going to be the last agent that will want to upset the applecart on the risk-on revival to date. It has plied the markets with more liquidity than anyone else. It wants risk-on. It wants irrational exuberance. It wants four dimensional easing – easy money, easy rates, easy currency and easy fiscal policy. It wants stronger growth and the lower cost of capital to markets is all part of that plan. Strong equity markets and stronger financial wealth perceptions are central to this. If consumers feel wealthier because their stocks go up and house prices start to stabilize, then that is part of the game-plan too. This is no anti-irrational exuberance subterfuge. The Fed is doing its usual job of massaging market expectations and getting the debate into the wide open about the means of tapering QE off at some stage in the future. It is not going to happen tomorrow, next week or next month. It may not even happen next year. The strategy remains intact. At some stage the Fed’s La Grande Bouffe appetite for Treasuries and low rates will eventually pop, but not yet. That will only happen when US unemployment sustains a break below 6.5% and inflation holds above 2.5%. We still have a two year event horizon on that eventuality. In the meantime, the market is long of liquidity and remains under-nourished in terms of risk appetite. So while the table remains filled, feast on.
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