I am the one who knocks


Central Banks Have “Distorted Classic Frameworks”

in Credit/Economy/Equities by

A strange thing has happened in the central bank-controlled post-crisis world. Equities have become akin to bonds and bonds akin to equities.

That is, the risk is in fixed income, whereas equities have become a shadow of their former selves, exhibiting low volatility and reliable returns. How long will this perversion last? How long, considering rising cross-asset correlations, before both bonds and stocks take a nosedive all at once? Well, we don’t know for certain, but given that the Bank of Japan has just tacitly admitted that the limits of monetary policy have been effectively breached, it might not be long.

Consider the following short but insightful bit from SocGen:

“The joint analysis of profit margins and equity volatility, which we have used widely in the past, tell us that equity volatility should be on the rise at this point of the cycle and not close to lows.
While end-2015 and early-2016 led us to believe that the trend was underway, Q2 and Q3 look abnormal with the VIX sub 12%. In our view, central bank policy and the low yield environment
are the culprits once again. By delaying the cyclical forces for so long and keeping rates artificially low, the Fed has created an environment which distorts classic analysis frameworks. US equities, despite trading at very high valuations, look more and more like bonds, posting limited but steady returns with low volatility, while bonds are taking on the role of the risky asset.”


(Charts: SocGen)

Once again, creative destruction destroyed.


  1. As always, I enjoy your posts, and I’m learning from you daily. Question: With so many sitting on the sidelines with lots of cash, do you think that liquidity will continue to dry up making it more and more difficult to sell short-term positions at a profit?

  2. Beautiful work again, Heisenberg!
    Perversion is the best word to choose! Central bankers should be in jail like pedaphiles!
    I don’t know when it will happen, but the next collapse will be gargantuan! Probably more or less consistent with the Elliott Wave idea of the beginning of a decline of a grande super-cycle!

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