Midday 7/12/2012

As global economic conditions have deteriorated, investors seem to think that economic weakness is good, because it means that the Fed and other central banks will have to take action to prop up their respective economies, creating more easy money opportunities.  This year, the hope that the Fed will continue to do the things that people have been decrying as ineffective or even bad has buoyed the stock market.  Of course, once the Fed announces they will take action, such as quantitative easing or buying up long bonds, the market will realize that this is bad; that it won't really help all that much; and that it could lead to future inflationary pressure as well as speculative bubbles in certain asset classes.  At this point, I can't really say whether that means a market crash is in the making or not.  It does, however, appear to me that the risks are much higher than is being recognized by the market.  The VIX is currently fairly low, while the S&P 500 is fairly high, but at the same time, we are seeing evidence that we are heading toward a global recession.  Further, the last I checked, the market risk premium was low, at less than 5 percent.  Just saying, there doesn't seem to be a whole lot of risk recognition going on at the moment, but I also think that at some point, investors will come to their senses.  Then again, maybe not.