In our latest thematic report, we look at how the unconventional monetary policies of the Fed et al are having distortionary effects on asset markets and increasing their inherent instability.

In the classic film The Italian Job, Michael Caine berates his motley crew of robbers when they use too much dynamite by shouting at them, “You’re only supposed to blow the bloody doors off!”

Central banks, by trying to make stock prices, house prices and bond prices all go up, have used too much dynamite and they will likely do more than ‘blow the doors off’. Unconventional monetary policy tools are intended to generate spill-overs to other financial markets. It is highly unlikely central bankers will be able to find just the right amount of money printing, interest rate manipulation and currency debasement to not damage anything but the doors.

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Is the S&P today in a bubble as a result of central bank policies? We introduce a mathematical framework that has been empirically shown to accurately model bubbles, and give a prediction for when they will ultimately come to an end. We apply this framework to the S&P 500 today.

Using it we get an estimate for a window of time within which the S&P will experience a “regime change”, which may involve a steep price drawdown.

We then consider our own suite of indicators for the S&P which point towards overbought and overvalued conditions with a backdrop of complacency and divergent market internals. This leads us to forecast any regime change to resolve itself through a – potentially steep – market drawdown.

The full report gives our prediction for when we believe this bubble resolution is likely to take place. To request the full report please click this link.