Tesseract Partners

With all systems set on “GO,” the broadly-advertised and widely-anticipated lift off by the Federal Reserve from the zero-bound Fed funds rate is expected to take place this Wednesday, December 16. One would hope that the fate of the tragic Danish prince does not befall what comes afterwards. As a skeptic of unconventional monetary policies, we look at the impending action and potential consequences with trepidation.

The upcoming Greek elections on Sunday, January 25 have whipped political and economic pundits into a frenzy. At the heart of the excitement is a possible win by Syriza, the left-leaning political party. This relative new comer on the political stage has promised a slew of populist programs, which include doing away with fiscal austerity, rolling back reforms, and renegotiating bailout terms with the country?s creditors.

Complacency is a dangerous mindset, especially for investors. Having been generously rewarded beyond their expectations, investors were coddled in the arms of complacency as 2013 drew to a close.

Households have made significant progress mending their balance sheet in the post-crisis period. Assets have been boosted on the back of higher home values and stock prices, while liabilities have been trimmed, mostly mortgages, thanks in large part to widespread home foreclosures.

Chairman Ben Bernankes press conference this week, commenting on the decision by the Federal Open Market Committee (FOMC) not to taper, reminded us of the famous slogan of Presidential hopeful George H.W. Bush at the 1988 Republican National Convention Read my lips: no new taxes. Yet, after he won the election, he raised taxes in an effort to reduce the public deficit.

Ignoring threatening clouds in the distant horizon, the financial markets are wrapped in a blanket of complacency. Consider the following. The Dow Jones Index has been flirting with the 2007 record peak. Implied stock market volatility, as measured by the VIX Index, is in the basement. Junk bond yields are at record lows, compressing spreads to within shouting distance of risk-free Treasuries. Securitization is back from the dead, while the drought in M&A activity is now getting plenty of rainfall.