Why the New Taste for Risks?(global economy)

Byline: Jan Loeys (Loeys is the global head of market strategy at JPMorgan Securities Ltd. in London)

Beware what you wish for: global investors would do well to heed this ancient warning just now. They usually love return and hate risk, which is what forces issuers of more dodgy securities to pay a risk premium. And over the past two years risk--or more precisely, volatility--has died in many bond, credit and equity markets. The prices of 10-year U.S. bonds and stocks have barely moved in the last year, trading in a range of 4 and 8 percentage points, respectively. Yet nobody seems happy about the newfound calm. Investors claim they don't get paid for taking risk because the premium on risky assets has collapsed. Traders, who make money by buying cheap and selling high, claim they can't make money when markets don't move. And central bankers are concerned because they fear that the lack of risk will make investors overconfident, eliminating the aversion to risk that is normally the best defense against irrational exuberance in the markets. So are investors like the farmer who always complains about the weather, hot or cold? Or is this period of calm a real cause for worry?

Volatility has collapsed because policymakers have done an outstanding job redirecting the global economy toward stable growth after the bursting of the Nasdaq bubble five years ago. Alan Greenspan has taught central bankers to focus on stability, to be risk managers, and his successor, Ben Bernanke, has vowed to pursue the same objective. Corporations did their part by cutting excess costs and paying down debt, pushing global profit margins to two-decade highs.

But we must admit that we also got lucky. The tripling of oil prices had the power to deep-six the global economy, had it not been for the global "savings glut," recently identified by Bernanke. This surge in savings helped to hold down interest rates, which fueled the global housing boom and consumer spending, keeping the global economy on an even keel. While most observers, Bernanke included, attribute this savings glut to central banks in Asia, corporations are the real penny pinchers. By the end of the bubble years in the late 1990s, global corporations were borrowing more than half a trillion dollars a year. Four years later, they were saving more than half a trillion dollars a year.

But will this stability last? A veritable laundry list of risks threaten the global economy, promising a rise in volatility. U.S. energy-supply conditions remain stretched in the ...