Jeff notes the combined impact of Liquidity and Risk Appetite on the markets:
Lastly, we believe liquidity certainly plays a role and currently the U.S. monetary base is exploding. Moreover, it is not just our money supply that is surging but Australia’s (+13% year-over-year), England’s (+13%), the Euro Zone’s (+9.3%), Korea’s (+10.3%), China’s (+16.9%), etc.
Yet as we have suggested, while liquidity is unquestionably a driver of asset classes, if investors are unwilling to take that liquidity and buy something with it, asset classes go nowhere. Manifestly, you can throw all the liquidity you want at the markets and if investors have no “risk appetite” they will merely take said liquidity and stuff it in a money market fund.
We, therefore, have argued that investors’ risk appetite is the ultimate driver of asset prices and after the nearly unprecedented rally from July 2006 to February 2007, participants’ risk appetites are currently high. When this will change is unknowable, but change it will. Yet as Charlie concludes, “While we are in uncharted waters in this regard, no one can foresee a financial accident, much less know its timing."
Reuters/CRB Futures Index
via Raymond James Investment Strategy