We Have One Market Concerned About Valuations, And Another Where Price Discovery Is Broken

We Have One Market Concerned About Valuations, And Another Where Price Discovery Is Broken

By Ven Ram, Bloomberg markets commentator and analyst

The first lesson that aspiring medical doctors are taught is simple: first, do no harm. Central banks may want to embrace the same principle.

U.S. stocks have been wobbly of late, with both the S&P 500 Index and the Nasdaq Composite tumbling more than one standard deviation a handful of times in the past month. For reasons, consider a host of factors, including spiraling oil prices that are bound to ripple through the economy and push up prices of services and goods, the Fed’s looming taper, concerns about China and lofty valuations that have left investors second-guessing whether current elevated levels are viable.

That is as it should be: markets are nothing but a series of dots plotted every day on the basis of information available then but only connected as a coherent sketch over time. That inherently means markets are volatile, but, oh, do they work beautifully over time as they adjust higher and lower to every new input in the economy.

Juxtapose that against bond markets that have completely lost the plot. Here we are, on the cusp of taper and a possible series of rate hikes down the line, and while Treasury 10-year yields have inched higher somewhat of late, volatility in rates is nowhere what you would expect and seem completely divorced from concerns that are dogging stocks. Blame it, at least to a great extent, on the Fed’s unbridled balance-sheet expansion, with the monetary authority buying bonds at a breakneck pace of more than $1 million a minute.

So we have one part of the market concerned about current valuations and correcting itself. Yet, we have another corner where price discovery is broken, and the principal difference as things stand between those two spaces is the overwhelming presence of a buyer at first retort masquerading as the lender of last resort.

Markets function best when they are allowed to get on with their assigned task by themselves.

Tyler Durden
Tue, 10/05/2021 – 20:45

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