Last Fall as currency volatility morphed into a pedestrian view of impending global meltdown, we suggested that the outlook was better than anticipated. Several years of central bank focus on "stability" had produced only chaos. Continued volatility and daily extreme market movement were accepted as here to stay. Nearly 1 in every 4 trading days saw the SP future move over .75% up or down for approximately 4 years. Embracing stability was the deep contrarian view and we made it, live on CNBC, from the pits of the CME Group in October.
The strategy involved the positive consequence of increased confidence as "things kinda, sorta worked out." In fact, confidence (measured in the professional trading community not consumer sentiment) has decreased as capital markets have calmed down. Professional opinion remains skeptical of prices reflective of Biblical monetary flooding and the political environment across developed markets is toxic.
We see a different risk emerging in this environment of catatonic stability. The shackling of markets is downgrading their significance as a feedback mechanism. The LTRO has improved metrics but also subordinated credits and shuffled the capital structure. There appears to be a fine line between stability and a coma. Financial repression is now the catch phrase moniker. We are inclined to a warning, markets have a way of breaking free.