You’re getting there, say the #BIS

With just under two weeks to go until the holidays begin, and just the hump of the Fed meeting this week to get through, we could all be forgiven for just thinking about crossing the 2016 finishing line intact. That, and gin. Yes, the survival instinct (to which cocktails are integral) is strong. But oh, we would be missing out on the bigger picture. We would be missing out on the panic that is to come. Hence why we should all take a look at the chart below, and then pay significant heed to the latest report from “the only people who called the financial crisis”, the central bank of the world’s central banks, yes the Bank for International Settlements.

So yes, here’s the one chart that keeps Soc Gen’s (in)famous BM-reader Albert Edwards awake at night:
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Albert’s point here is that policy uncertainty is at all-time highs, but the world generally apparently looks alright still. The VIX is happily at the lows of the year as equities make new highs. Even the bond market sell-off has been relatively well contained. The BIS pick this up in their Quarterly Review, pointing out that the recent US bond market sell-off was greater than 99% of all one-day moves in the last quarter-century – “But the jury is still out, and caution is in order. And make no mistake: bond yields are still unusually low from a long-term perspective”.

The BIS warn that this resilience doesn’t mean we will have fewer flash crashes – in fact, quite the opposite.

‘We do not quite fully understand the cause of such unusual price moves … but as long as such moves remain self-contained and do not threaten market functioning or the soundness of financial institutions, they are not a source of much concern: we may need to get used to them.’

Why is this happening? Well the BIS believe it’s to do with that exponentially higher blue line in Albert’s chart. Yes, there’s a heck of a lot more policy uncertainty out there, meaning we have to think more:

‘It is as if market participants, for once, had taken the lead in anticipating and charting the future, breaking free from their dependence on central banks’ every word and deed.’

Hurrah! Huzzah! Blondemoney praises the markets to the heavens if this were true. That’s exactly what we need to be doing, using our judgement to assess the increasing uncertainty, leading to step changes as we re-price for new events.

Oh but if only BM were as sanguine as the BIS. If this paradigm shift is indeed happening, and it’s been bumpy so far, then what happens when we realise that this is happening? That we do need to engage judgement? That politics is non linear? That we can’t build a quant model to tell us the answer?

Then this year will have just been the warning shot. Prepare for many more tremors ahead.

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