Daily: Easy money shifts private portfolio preferences and increases risk-taking

For most market watchers, it shouldn’t be a surprise that easy money has an (intended) effect on markets in increasing risk appetite as ‘risk-free’ returns diminish. This cycle is no different. A number of today’s articles point to a resurgence in risk amid a global economy awash in money that has brought risk-free rates down to negative territory.

Rather than perceive this dichotomy as some sort of market anomaly, we should look at it as the suppression of real returns which it is. Central banks globally are engaged in extreme levels of financial suppression to re-animate animal spirits and get credit flowing so that we can resume business as usual. These actions have impacted credit markets and boosted asset prices. For example, in the US, the housing market is clearly in a cyclical recovery now. The commercial real estate market is entering frothy territory as evidenced by the Bloomberg post below. Investors are piling into CMBS because investors are "seeking high yields amid record-low interest rates." It won’t end well in US CMBS or anywhere else where excessive risk taking is occurring, the JPMorgan Chase London whale trades as a prime example.

There is no free money here. The Fed and other central banks are basically redistributing wealth by suppressing returns in fixed income assets and while this seems all fine and well given the economic malaise, it is having a negative impact on asset and capital allocation which will be found out in the next downturn. The better solution would be a recognition and writedown of bad debts as the ECB has begun advocating with private sector participation in bank restructuring in the euro zone.

But the market wants more easing. It’s begging for it and Bernanke has not delivered…yet. In the meantime, expect bond yields to maintain their low rates to reflect economic distress, while risk assets are artificially inflated as easy money shifts private portfolio preferences and increases risk.

The “Central Banks’ Central Bank” Slams the Federal Reserve | The Big Picture

Taiwan 10-Year Bond Yield Near Record Low on Easing Speculation – Bloomberg

Just Released: Housing Checkup–Has the Market Finally Bottomed Out? – Liberty Street Economics

CMBS Leverage Most Since ’07 as Standards Loosen: Credit Markets – Bloomberg

Ben Bernanke’s speech: in full – Telegraph