A Magical Land Where the Dow Will Never Fall

From Bill Bonner in London watching the Dow...

Did the sun ever shine more brightly? Did the air ever smell so sweet? Was ever there a fairer land, or a finer race to walk upon it?

Not according to the Dow...the VIX...or even the spreads in the bond market.

The Dow has never been higher than it has been these last few weeks. And last week, the VIX hit a new all-time record low. The VIX is an index of activity in the options market. People buy options when they are afraid that prices might get away from them. The record low VIX reading means that investors expect the going to be good forever.

Also at a near-record low is the spread between junk bonds and better credits. When the going gets rough, or people expect it to get rough, they insist on high-grade bonds, and lend only to 'junk' borrowers at much higher rates of interest. When the spread between the junk and the high-grade bonds narrows, it means investors see little risk.

You can hardly drop a mortgage broker out of a helicopter without him falling on a householder who believes a 'soft landing' in the property market is coming. And you can't fire a pistol on a Wall Street window without mortally wounding an investor who believes the dollar will remain strong forever.

Yesterday, we reported on a research paper from Deutsche Bank (NYSE: DB) that told us a "new global imperial cycle - meaning a cycling of funds that guarantees global prosperity - is now in place and...the global economy is thus entering a period of long-term prosperity." Oh happy days! Oh happy days!

So confident and complacent are investors, that they lend the U.S. government - the world's biggest single debtor - money for a 30-year period at an annual interest rate of only 4.51%. After inflation and taxes they cannot expect to have much left. Somehow, they must expect it to work out.

And we note too, that the mammoth growth in derivative contracts - heading towards a face value of half a quadrillion dollars ($500 trillion) - also owes its pullulation to institutional investors' irrational equanimity. Investment firms sell Credit Default Swaps by the boatload, feeling sure that they will never have to pay up, because the credits definitely, surely, absolutely won't default.

"Nobody is worried about anything," says John Authers in the Financial Times.

This is not a Goldilocks scenario, says Ed Yardeni, speaking for the securities industry and the terminally delusional. This is 'better than Goldilocks.'

But the funny thing about this funny ol' world, is that the more people expect things to remain the same, the more shocked and discomfited they are when they don't. Just because everyone is fully invested in stability, in other words, it doesn't stop the world from turning. It only makes the twists hurt more.

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