Buttonwood: Liquid diet

SOLDIERING has been described as long periods of boredom punctuated by moments of sheer terror. Financial markets seem to be developing the same pattern.The boredom stems from massive central-bank intervention in markets. As long as investors remain convinced that central banks are in control of events, and can adjust monetary policy to avoid recession and inflation, volatility will be low for most of the time. In these quiet periods, the dominant trend will be momentum—investors buying the assets that have most recently risen in price. By September, for example, investors were heavily exposed to peripheral European bonds (the debt of Greece and Spain, for example) and to cyclical stocks (those that perform best when the economy is doing well).But when the trend changes, prices may move very sharply, as the terrified herd stampedes out of what can be illiquid markets. In the last four weeks, defensive stocks have outperformed cyclicals by one of the greatest margins in history, according to BlackRock, a fund-management group.There was another good illustration of the herd mentality on October 15th, when the yield on ten-year Treasury bonds fell by...



from The Economist: Finance and economics http://www.economist.com/news/finance-and-economics/21627650-recent-market-turbulence-may-be-only-foretaste-liquid-diet?fsrc=rss|fec