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Market Is More Fragile Now Than Pre-Lehman

Posted By yihan On June 8, 2012 @ 8:40 am In Money Watch | Comments Disabled

Zero Hedge [1]
Friday, June 8, 2012

The significant rise in global systemic risk that occurred in 2008 remained until mid 2010 when it began to subside a little as Jackson Hole and QE2 seemed to allay fears somewhat. However, in the last year or so, BofA’s market fragility index has soared higher alarmingly signaling higher systemic risks than in the peak pre-Lehman era. This confirms the massively elevated signal for global systemic risk that credit markets are also sending.

Systemic Risk inferred from equity market variance decomposition…

Market Is More Fragile Now Than Pre Lehman 20120608 fragile 0 [2]

 

and Global Systemic Risk from the credit market…

Market Is More Fragile Now Than Pre Lehman 20120604 FSB30 0 [3]

 

But it appears we have become Pavlovian in our learned response to any systemic risk as the chart below shows. The Fed has acted each time 5Y5Y forward inflation expectations drop below 2%. We were well on our way to this just a week or two ago (red arrow) only to have our own reflexive expectations of a Fed-Save drive inflation expectations back up (green arrow) and thus removing the possibility of QE in the short-term.

 

Market Is More Fragile Now Than Pre Lehman 20120608 fragile1 0 [4]

 

It would appear that while systemic risks are at peak levels, the Fed needs the ‘public’ to believe it is not always there to save the day in order that when it does save the day, its effect is more than transitory.

Finally, for those curious just how it is possible that even with trillions in implicit backstops the market is now less stable than with AIG, Lehman, Merrill and all the soon to be failed banks, the answer is simple: back then the market was in the hands of the, well, market. Now it is solely controlled by a few politicians and a even fewer academics. In other words, whatever can go wrong, will.


 


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URLs in this post:

[1] Zero Hedge: http://www.zerohedge.com/news/market-more-fragile-now-pre-lehman

[2] Image: http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/06/20120608_fragile.png

[3] Image: http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/06/20120604_FSB30.png

[4] Image: http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/06/20120608_fragile1.png

[5] EMU break-up risks global deflation shock that would dwarf Lehman collapse, warns ING: http://www.prisonplanet.com/emu-break-up-risks-global-deflation-shock-that-would-dwarf-lehman-collapse-warns-ing.html

[6] “Lehman 2.0″ Imminent Warns John Taylor: http://www.prisonplanet.com/lehman-2-0-imminent-warns-john-taylor.html

[7] Federal Reserve investigated Lehman rumors: report: http://www.prisonplanet.com/federal-reserve-investigated-lehman-rumors-report.html

[8] Lehman Whistle-Blower’s Fate: Fired: http://www.prisonplanet.com/lehman-whistle-blowers-fate-fired.html

[9] Who Got Nailed on Lehman’s Credit Default Swaps?: http://www.prisonplanet.com/who-got-nailed-on-lehmans-credit-default-swaps.html

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