Over the years we have come to the conclusion that there are only two phases of world financial markets, a risk seeking and risk adverse phase. Over the last 5 years these phases have become somewhat easier to identify with correlations between risky areas of each asset class having moved closer to 1. In essence it does not really matter if you are long the Kiwi dollar Yen, junk grade corporate debt, equities in general, crude oil, or short the USD Index. In essence it is all the same trade. We think this is due to the proliferation of trading instruments available to traders of description. We do not see correlations between risky assets falling anytime soon.
We developed our proprietary global risk index to measure the crowds’ appetite for risk some ten years ago. It is essentially an index of risky grade debt and high yield currencies. What makes our proprietary global risk index different from other gauges of risk, such as the Bloomberg Financial Conditions Index is that it is a trending rather than a “mean” reverting index.
It seems that globally investor’s appetite for high yield/high risk assets continues unabated. What has been quite remarkable are the new highs that occurred in this index over the course of last week when the S&P fell. While our proprietary global risk index continues to move higher the odds suggest that equities and commodities will also move higher and the USD Index lower.
We have no idea how long the risk seeking mood of the market will last. All we know is that markets trend and we will boldly follow this trend until the end.
