This Happened Twice Before, And Each Time Stocks Crashed

Thursday, May 22, 2014
By Paul Martin

Wolf Richter
THURSDAY, MAY 22, 2014

Stock market participants and the players around them cling to every word proffered by the Fed that might reveal its secret plans because everyone knows that the words from the Fed and the money it prints and the interest rates it sets have been the fuel for the stupendous rally that started over five years ago. Wall Street wrings the last drop of hype and hope out of these words and spins them and doctors them to rationalize ever higher stock prices.

But recently, there has been one word that has moved up on the central-bank public worry list. As so often, it did so in a coordinated manner, and within days, it cropped up at the Fed, the Bundesbank, the Bank of England, the ECB….


It’s a condition of super-low volatility where the markets have become a one-way ticket to heaven, when market participants think that asset prices can only go up, that stocks will always rise, that a 4% decline is a correction, that even the worst junk bonds won’t ever default, that inflation doesn’t exist – and no one demands being paid for the risks they’re taking on because there are no more risks. Just look at the VIX volatility index, or fear index as it’s called: it has descended into a state of somnolence.

Central bankers are now worried that this creature of their making – this happy state of complacency amidst gorgeous and plump asset bubbles – might cause the next crisis. They’re worried that no one will be prepared for when it all turns around.

Alas, beneath the surface, stocks have already turned around.

Volatility is already tearing into stocks, and those holding them outright, rather than safely out of view in some confidence-inspiring fund, have watched “wealth” and dreams go up in smoke. But they know their formerly red-hot darlings will soon reach new highs, and that’s when they’ll sell them to a greater fool, and so they’re hanging on by the skins of their teeth, and others are buying because complacency still rules the day.

The Rest…HERE

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