Don’t Be Fooled by These Calm Markets

What is happening in the world of money? Well – the most striking thing is: nothing.

It doesn’t seem to matter what happens. Dysfunction in Washington. Meltdown of the techs. No matter how rough the seas get, the markets glide along… scarcely noticing the storm-tossed waves below.


Thankfully the world’s central planners are so well-versed in egging on the creation of an ever greater mountain of debt and seemingly limitless asset price inflation with their “scientific” monetary policy that a complete blow-up of the the financial system only threatens now and then… most of the time we are in “moderation” mode. Nowadays we are in something that feels like a Valium-induced waking dream. It couldn’t be better… volatility has just served up its greatest disappearance act since the end of the last “moderation”.  What could possibly go wrong? – click to enlarge.


Remember “The Great Moderation”? That was the title of a speech then-Fed Chairman Ben Bernanke gave in 2004. Thanks to such able guidance by the Fed, he implied, the world’s financial system was calm, stable, and safe:


“One of the most striking features of the economic landscape over the past 20 years or so has been a substantial decline in macroeconomic volatility…

Several writers on the topic have dubbed this remarkable decline in the variability of both output and inflation “the Great Moderation.” Similar declines in the volatility of output and inflation occurred at about the same time in other major industrial countries, with the recent exception of Japan, a country that has faced a distinctive set of economic problems in the past decade.

Reduced macroeconomic volatility has numerous benefits.

(emphasis added)


The courageous mastermind of the Valium Era explains the secret sauce behind his success.


Well, yes. Bernanke was talking about the economy. But investors got the message. The Fed chairman was not merely describing “moderation.” He was promising it.

And so, for the next three years, it was up, up, and up for the stock market. And then, it was down. The Great Moderation set up investors for the crisis of 2008.

When market volatility – a.k.a. price swings – seems to vanish, people feel no need to protect themselves.  They buy without doing research. Or if they are traders, they sell “vol” – confident that whatever heebie-jeebies markets may have suffered in the past, they’ve got nothing to worry about now.

No need to put on hedges. No need to hold some cash just in case. And no need to watch your back. The Fed will watch it for you!


Foolish Courage

The Great Moderation continued… until it was history. In 2008, stocks were cut in half and the entire world’s finances were on the verge of a complete meltdown.

This overdue correction was snuffed by the Fed – led by Mr. Moderation himself, Ben Bernanke, who mounted the most immodest rescue effort ever attempted.

The Fed increased its balance sheet eightfold. The world – suckered by lower borrowing rates – added another $80 trillion of new debt. Mr. Bernanke, with conceit bordering on insanity, lauded this act of bumbling vandalism in his book, calling it The Courage to Act.


An illustration of what happens when Fed chairmen are overwhelmed by courage – click to enlarge.


And now, thanks to continued reckless courage on the part of the European Central Bank and the Bank of Japan – which are both still pumping more cash into the system – we enjoy another period of “moderation.”

Volatility is back down to brain-dead levels. The news hath no sting. Bloomberg:


“U.S. stocks snapped a two-day slide to close at fresh records as technology shares rebounded from the worst drop of the year… Treasuries were steady as the Federal Reserve policy meeting kicked off.”


Nothing shocks this market. Nothing rocks it. Nothing socks it to it.

Nothing does –  that is, until something does.


Charts by: StockCharts, St. Louis Fed


Chart and image captions by PT


The above article originally appeared as “Don’t Be Fooled by These Calm Marketsat the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.



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