Policy induced Systemic Distortions

Policy inducing systemic distortions break investor confidence!

http://zerohedge.com/news/2015-12-15/what-happens-when-stocks-catch-commodities

Since the naughties financial crisis, global markets have been largely steered by Central Bankers, NOT organic economic growth. Central Banks stepped in as the “buyers of last resort” to provide a backstop to the system.

The problem is that Central Bankers are prone to human hubris, specifically overconfidence in the validity of their opinions and abilities.

Thus, rather than stepping back once the Crisis had passed (2011-2012), Central Banks continued to prop up the markets and push.

As a result of this, the initial distortions in the capital markets induced by QE and Zero Interest Rate Policy (ZIRP) became systemic in nature. Investors no longer bought assets based on perceived value relative to the real economy. Rather, they bought based on perceived Central Bank actions and promises.

The most egregious example of this pertains to the sovereign bond market where investors began to front-run Central Bankers QE programs.

This was a classic case of "buy the rumor, sell the fact."

And since the Fed began hinting at additional policy soon after any actual policy ended, the bond markets became permanently skewed as investors were continuously reacting to hype and hope more than economic realities.

So if the market’s risk profile becomes skewed by Central Bank policy (and verbal interventions in the form of promises of additional monetary policy), the entire financial system’s risk profile becomes skewed.