Bubble Fears Are Rising as Financial Conditions Flash Boom Times

The comments below are an edited and abridged synopsis of an article by Cecile Gutscher and Libby Cherry

Rick Rieder (Blackrock) and Mohamed El-Erian (Allianz SE) are among those warning that systemic risks will multiply unless measures are taken to pare extraordinary pandemic stimulus. While policy makers are aware of the dangers in the easy-money era, their accommodative stances are encouraging ever-increasing flows to the riskiest markets.

Bubble Fears Are Rising as Financial Conditions Flash Boom Times - BullionBuzz - Nick's Top Six
Conceptual global/economic crisis of Covid-19 virus epidemic. Covid-19 virus illustration downloaded from CDC than layered and manipulated. Extraordinary pandemic stimulus concept.

The crypto industry is over $3 trillion in value, the biggest junk bond ETF is booming, and major stock indexes are sitting near record highs. No wonder a cross-asset gauge shows the easy US investing climate is one for the history books.

The risk binge is intensifying worries over market froth and lax central bank watchdogs. The world’s biggest, the Fed, has  delayed interest-rate increases until the labour market is in better shape after announcing a reduction in asset purchases.

Last week the Bank of England shocked markets with a decision not to raise rates. Meanwhile, ECB President Christine Lagarde pushed back against wagers on a rate hike in 2022.

With supply-side pressures threatening growth, central bankers risk either acting too fast and derailing recoveries or being too slow and letting inflation get out of control. Officials are therefore taking a measured approach, despite some investors pressing for a more decisive end to pandemic stimulus.

Catherine Mann, a Bank of England policy maker who voted to keep rates on hold, sounded a cautious note. The economist was seen urging an end to asset purchases, saying it fueled an “elevated level of risky asset prices.”

Investors may be doubling down on risk, but at least they’re building a protective cushion.

According to the latest Bank of America Corp. monthly fund manager survey, cash allocations rose to a net 27% overweight, the highest since July 2020, while institutional traders are hedging in the stock-derivatives market. And with corporate earnings beating expectations, there are good reasons for credit and equity rallies in the US and Europe.

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