Briefly, while the last few crises might have been a surprise to many….

If you knew where to look, the late 1990s stock market boom and the developing build in debt was easy to spot, but the timing of the unwind was much more difficult.  You never knew how long asset prices were going to spiral higher even though you knew the pricing risks – the higher the market for a given economic profile the lower the future return.

Nevertheless, you knew when the trigger came that asset prices would react.   This was the same with the build up of debt (asset focussed money supply growth) and structural economic imbalances up to 2007: if you were aware of the magnitude you would have been aware of the risks.  

With the 2007 crisis the timing was however much clearer as you had something intensely physical working through the system, and hence it was much more than investor psychology that would be the arbiter of the eventual outcome. 

What makes the current moment in time different is that we have all the necessary ingredients and many triggers for another crisis but also a set of world central banks that have so far been able to wave their magic wands to “make the problems go away”.  

We have a combination of the late 1990s market exuberance with the deep seated build up of the structural issues that beset the 2007 crisis; we know markets are over valued, possibly significantly so; we know the economic problems worldwide are likewise still significant; but we have no idea how long the magic wand will continue to work as it supports asset prices and defends the financial system against risks which could well have already wiped it out.  

The economics of the market and economic cycle, as well as the natural triggers that end excess, have been commandeered, for now.   This is perhaps the most troubling point of all.   Asset prices need to reflect economic realities and risks, otherwise they become risks to the system itself.

See also:

Time to fight the Fed- & We need to talk about deflation, again [Update]   (FT Alphaville)

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