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The Risk of Stock-Market Vertigo

What can possibly go wrong with stocks these days? Five years of the Fed’s QE and zero-interest-rate policy, and look what happened: risks no longer exist. They’ve been priced out of the equation. But now the illusion is ending.

What can possibly go wrong with stocks these days? Consumer confidence in March leapedto the highest level since January 2008, just before the financial crisis annihilated it. Institutional investors’ risk appetite, as measured by State Street’s confidence index, backed off only a smidgen in March to the second highest level in the data series going back to 2005, down from February’s record high.

“Geopolitical risk in Ukraine, Turkey, and other emerging markets has yet to have a significant negative impact on institutional investor behavior,” is how State Street explained the phenomenon where all risks are irrelevant.

And IPOs are flying off the shelf. Cloud-storage startup Box filed for an IPO today. At its last round of funding, it was valued at $2 billion, on the hope that it could be dumped into the lap of retail investors at several times that. It’s in a crowded field with low barriers to entry where all comers from Cisco to startups like Dropbox (valued at $10 billion!) fight it out mano-a-mano, and where the NSA has been deploying its dragnet. In 2013, Box had $124 million in revenues, spent $166 million on sales and marketing, and sported a net loss of $169 million. It’s but one of 32 US startups with valuations of $1 billion or more, lined up to go public while the feeding frenzy lasts.

Five years of the Fed’s QE and zero-interest-rate policy – and look what happened: Risks no longer exist; they’ve been priced out of the equation.

But the illusion is ending.

Last year, the Fed’s taper cacophony, which markets finally took seriously in May when bonds plunged and yields soared, led to the expectation that the Fed would start backing off its bond purchases in the fall. Scared witless by market gyrations, the Fed chickened out, only to initiate a watered-down version of the taper a couple of months later. Despite those on Wall Street who’d bandied about the meme that the Fed would forever inflate asset prices with its money printing binge – they’d longingly dubbed it “QE Infinity” – that binge is now scheduled to be tapered out of existence by October. Stocks became jumpy. Rather than rallying as they’d done last year and the years before, they’ve since gone nowhere.

Now the Fed cacophony has switched to interest rates, and it might sideline the biggest stock buyers of all times, buyers that insist on buying at peak prices and ridiculous multiples: corporations buying their own shares.

It was kicked off in earnest by FOMC Chair Janet Yellen during her post-meeting press conference last week. As she saw it, the Fed might start raising rates “around six months” after QE ends. Suddenly there were visions of ZIRP dissolving into thin air just like QE is dissolving before our incredulous eyes. Markets plunged.

She’d put a time stamp on ZIRP.

Soothsayers immediately ascribed her statement to a rookie mistake, that she hadn’t meant it, that it was her first press conference as newly anointed Chair. She, a well-known dove, couldn’t possibly ever want to raise rates. Word got around and markets recovered on the consensus that she’d misspoken.

Two days later, St. Louis Fed President James Bullard dashed those hopes. The six-month time stamp wasn’t unexpected at all.

Read the rest of the post at Testosterone Pit. View original post.

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