Central Bank Shrink
As I have stated in previous blogs, financial markets are driven by 2 emotions: fear and greed. If fear reigns, investors sell risky assets and enter safe havens, such as high quality government bonds, the Swiss Franc and gold. The flight to safety results that governments only have to pay very low interest. Fair: low risk, low return. Since the 2008 financial crisis, fear has dominated financial markets. But greed always returns. A hunger for yield.
Last week, Central Banks warned that financial markets may be too optimistic. Market optimism results in risk appetite and investors will buy more high risk financial assets, such as shares and high yield bonds (Junk Bonds). Ironically, it is the Central Banks policy that push investors to the risky side (no, not the dark side). The immense Central Banks interventions of the last six years to prevent a collapse of the financial system, has driven interest levels to historical lows.
So there we go again: the continuing cycle of fear and greed enters a new loop. Financial markets suffer from manic depressions and the Central Bank is the shrink. Where is my medicine?