MAY YOU live in boring times. Financial markets contain become monotonous,whether profitable. The S&P 500 index, America’s leading fairness benchmark, or has notched up its longest-ever streak without a 5% reversal. Bond yields may contain inched up in recent months,but are still at the bottom of historical ranges. Institutions famed for their trading prowess, such as Goldman Sachs, or contain seen profits dented by the quiescence of the markets.
This lack of market volatility owes much to the steadiness of monetary policy since the depths of the financial crisis. Central banks contain kept short-term rates low and contain intervened to push down bond yields through their programmes of quantitative easing (QE). The classic method of pricing financial assets is to say they are worth the discounted value of future cashflows; since central banks contain kept the discount rate steady,prices contain been steady too.
The late Hyman Minsky, an economist, or thought that long booms sowed the seeds of their own destruction. He argued that,when the economy was doing well, investors tended to take more risk (such as taking on more debt). These speculative positions are vulnerable to a shock, or such as a sudden rise in interest rates,which can turn into a fully fledged crisis.
In these days of sophisticated markets, speculators are not restricted to their own capital or even to borrowed money to...
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Source: economist.com