There is this impression of quiet times steadily carrying on, with the Fed keeping rates steady, the US labour market steadily putting people to work, and the US stock exchanges steadily setting new records. What more could you want?

Yet there is this unease coursing through the system, focused on banks, but also on overpriced assets and an unspoken anxiety things could unravel quickly (the usual fear of the exposed). Perhaps not an irrational fear, but still over the top?

What happened at Welsh Fargo is fraud if difficult to rationalise (they did what?). Still, it unlikely contaminated the entire banking sector. The US banking sector remains sound, its lending growth at 8% motoring steadily for years now.

Deutsche Bank has in recent times been crippled by scandal and regulatory fines, starting with Libor fixing ($2.5bn fine) and undeclared trading with sanctioned Iran (($257m fine), Brexit dealt a major shock to Deutsche with its large London presence, there has now followed a monstrous fine for infractions (mis-selling) in dealing in US mortgage securities pre-2008, and this weekend an Italian court found Deutsche guilty of falsifying the accounts of an Italian bank, attracting yet more potential fines.

Deutsche Bank has created new image problems for European banks, that the sector is weak and could go down (and Europe with it…). In reality it is unlikely Germany will allow that to happen to its biggest bank without good reason. The latest outrageous US fines dished out appear already to have been down scaled (as happened years ago with US banks on the same issue), instead of $14bn now apparently a matter of $5.4bn. Still monstrous. Yet these and any Italian fines will need to be absorbed, and thereafter they will have to pick themselves off the floor with or without government (Berlin) assistance. Market reaction since late last week has turned positive suggesting that they will somehow succeed.

But there is by now a large class of investors fearing a bigger problem. Namely that the central banks have for so long supported asset markets, by buying bulk quality bonds, that bond prices are artificially high (yields artificially low) and that equity prices have been swept along in this general repricing. If central banks were to cease being supportive, instead turning to policy tightening, the asset repricing could be fearful?

This possibility has been around for years, and so far simply indefinitely delayed, with central banks if anything driving rates ever lower and asset prices ever higher. With the future policy trajectory getting ever flatter, be it Fed or ECB or BoJ. A function of economic realities on all continents post-crisis.

But this is being questioned. It is seen as too pat. Surely something will turn up changing the story line? Either another crisis, in which case central banks look like out of toolbox ammunition, yet claim not to be (so yields can go yet lower, and asset prices yet higher?). Alternatively, central bank patience pays off if waiting long enough, economic recuperation becomes advanced enough that the US labour market reaches full employment, and more policy assertiveness can be more easily absorbed.

More policy assertiveness? That doesn't equate with a flat rate trajectory. That suggests more rate lifting than so far allowed in pricing. It suggests a 10yr yield of 1.6% is really too low, when nominal GDP income is growing steadily, year in year out, by nearly 5%. It invites a greater caution about what comes next.

But if for eight years there has been crying wolf, about too low bond yields (which only proceeded to go even lower), it is perhaps difficult to believe that such yields are too low and definitely will not remain at this level indefinitely. The only argument needs to be about timing. And perhaps what will trigger it?

Will it be a pre-emptive Fed after all? Will it be a Fed finding itself behind the curve (after years being ahead of the curve?). Will it be the new President pulling the rug from underneath all with an aggressively proactive policy proposal to an accommodating Congress, and this fundamentally changing the playing field?

Or will all these possibilities just have to wait, it being too early, the trajectory remaining flat and markets in their totality not buying any other reality?

SA, along with other risk markets, certainly would like the flat trajectory party to continue, preferably indefinitely. That way our search-for-yield can remain alive, and our higher political risk premium can keep attracting foreign investment appetite, whatever our political antics. And so far this year at least this remains the reality.

Watch how SA raised $3bn of Dollar bonds last Friday, and two-and-half times oversubscribed, too. It smacks of making hay while the sun still shines brightly. Apparently with so many countries downgraded already this year, any that succeed in maintaining their rating acquire additional attractiveness, questions unasked. But that would no longer apply past a downgrade, especially if to junk. But is that downgrade so certain? Ever more fund managers in New York and elsewhere would like to know. Nothing seems quite what it is...

But to expect the search-for-yield party to go on forever is a very long time. But then we don't have a second act, do we, with no early elective or consultive political leadership conference on the cards, the whole agony to be stretched out until December 2017 as if the world will be accommodatingly on standby for us throughout. And then another 18 months to mid-2019 to the next election, to see whether there will be any policy change of note to favour (or disfavour).

It is as if we dare the world to do its damnedest and see if we care. Be careful. The world might just unexpectedly oblige. And then what….?

Cees Bruggemans

Bruggemans & Associates, Consulting Economists

Website  www.bruggemans.co.za

Email  economics@bruggemans.co.za

Twitter  @ceesbruggemans

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