Rather than attempt to predict the unpredictable – that is, specific events and price levels – let's look instead for key dynamics that will play out over the next two to three years. Though the specific timelines of crises are inherently unpredictable, it is still useful to understand the eventual consequences of influential trends.
In other words: policies that appear to have been successful for the past four years may continue to appear successful for a year or two longer. But that very success comes at a steep, and as yet unpaid, price in suppressed systemic risk, cost, and consequence.
Trend #1: Central Planning intervention in stock and bond markets will continue, despite diminishing returns on Central State/Bank intervention
Intervention in the stock market may successfully keep the markets in an uptrend or a narrow trading range for 2013, but this would only increase the odds of a dislocation/crash in 2014 or 2015. Temporary success does not imply permanent success or even continued success of intervention. Why is this so?
Virtually all Central Planning intervention – fiscal and monetary stimulus, subsidies and market manipulations – suppresses market pricing of risk and volatility. In a healthy, transparent market, millions of participants openly price risk, volatility, assets, and capital. This creates low-intensity volatility and resilience. When transparent markets reprice risk, assets, and capital in a panic, the recovery is equally dramatic as participants quickly adjust to the repricing. Confidence is based on transparent pricing by participants, not officially sanctioned manipulation.
The purpose of Central Planning intervention is perception management. Central Planners want to restore confidence; not with transparent repricing, which would hurt holders of assets and banks, but by engineering a steady rise in asset prices and reversing any declines with indirect buying.
This instills confidence via participants' "Don't fight the Fed" belief that Central Planners will never let the market go down.
History rather unkindly finds that Central Planning elevation of markets and suppression of risk is impermanent: Intervention leads to crashes. Why is this so? Risk cannot be eliminated; it can only be transferred or suppressed. When it is suppressed, it...
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