Moral Hazard + Bubble = ?

"The whole point of financial stability reports is to warn about stuff that might go wrong in the future but probably won’t. Even so, the latest missive from the IMF last week was bracing.

“'Valuation models show risk asset prices well above fundamentals, raising the risk of sharp corrections,' it said. ... Investors and policymakers should be alert to the prospect of 'disorderly' corrections and the potential for self-reinforcing doom loops, where a loss of confidence in the sustainability of government debt whacks the bond market, which in turn whacks risky assets priced for nirvana, which in turn hammers the banking sector, both traditional lenders and shadow banks that are locked in an embrace of 'increasing interconnectedness.' The Bank of England struck a similar tone, noting the risk of a 'sharp market correction.'

These things are extremely precisely worded. When such august institutions talk of valuations 'well' in excess of observable reality, and of 'sharp' or 'disorderly' corrections, they are very much switching on the fasten-your-seatbelts sign.

In the private sector, heavy-hitters are also urging caution, including JPMorgan’s Jamie Dimon, who observed that 'you have a lot of assets out there which look like they’re entering bubble territory.' ...

"And still, markets are humming along just fine. This is not complacency, as such. ... The foundation of this worldview is an unshakeable belief in the rescue squad — a sense that if markets do get seriously tricky, for any reason, the cavalry will soon arrive, in the form of large interest rate cuts or even asset-purchase schemes from central banks. Investors, both professional and retail, have become accustomed to this ever since the great financial crisis of 2008.

"Policymakers are keen to stress that the bar for emergency intervention is high, but investors are happy to call their bluff. ... The moral hazard is extreme here ..."

~ Financial Times from today's article 'Bubble-talk is breaking out everywhere'