“Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.“
Interest rates are at the very core of risk pricing. We are doing it all over again — but it’s even worse this time because interest rates have been held even lower and for a longer period of time…not to mention the ever-present quantitative easing and bond buying. IMHO, we are really and truly screwed. This will not end well.
We’ve learned absolutely nothing from the financial crisis.
