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Everything is fine, just like 2007

25 Jan 2013 by Jim Fickett.

John Authers has a nice piece in the FT today, on whether currently popular rosy outlooks are justified.

Republicans in the House have abandoned, for now, their threat to force the US into default …

In Europe, life is calmer. Friday’s news that banks were starting to repay the emergency funding they received a year ago from the European Central Bank further settled the belief that the eurozone crisis is over. …

China’s data suggest it has executed the much hoped-for “soft landing”. …

As for volatility, as measured by the CBOE Vix index, it is at its lowest since April 2007, just before the debt crisis.

In other words, almost everyone thinks everything is just fine, just like in 2007. That alone should give you pause.

I am not predicting the next crisis. Although the bond market is clearly in a bubble, I do not yet see any signs of the sharp instrument that will prick that bubble. But one thing we should all have learned from 2007 is that when trust in the Fed is high, and markets are complacent, it is time to keep a sharp eye out for trouble on the horizon.

Discussion

Jim Lindsey, 2013/01/26 13:57

Jim-

I agree with your assessment that the odds are increasing of a turndown. Everything is obviously not fine but the market is acting as such. As a retail investor it seems that buying SPY right now is foolish chasing. But, I can't help but feel that perhaps due just to demographics and housing finally coming back that we're finally going to notch up into the next leg of advancement in the market and clear 2007 highs. What major risk am I missing?

Jim Fickett, 2013/01/28 21:29

Good question. On the one hand, the market may well go higher, I agree. On the other hand, I think the good times are quite fragile, so that if, say, interest rates were to go up despite the Fed's best efforts, things could degenerate quickly. How might interest rates spike? Well, Israel could bomb Iran. The euro area recession could be deeper or longer than most currently foresee, leading to defaults among all those CCC issuers that are already on the edge. Or Abe could succeed in creating inflation in Japan and scare everyone out of JGBs, precipitating a debt crisis there. It is hard to say what will trigger an end to the bond bubble. Right now I don't see any clear signs of a change in trend.

My approach is to try to buy cheap assets (hard as they are to find), so as to take advantage of the rising market without taking too much risk.

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