Well now, a month ago I wrote a piece comparing the current mania for buying government debt to “The Emperor’s New Clothes”. Let’s all lend to the government for returns massively below the level of inflation and growth and pretend it’s all good. Individually we all know the guy is in the nude, collectively we just ignore the fact.

Within a matter of days, a series of emperors – central bankers globally – rushed to point out they were indeed naked! In itself not a pretty thought. Ridiculously overvalued bond markets did what ridiculously overvalued assets have done for 500 years – they fell in price. And with the merest whiff of QE removal in the air even that decade-long bastion of stability, the global equity market, had a little wobble too (short lived of course).

The reaction to a potential 180 degree turn from the ECB, Bank of England, Bank of Canada and (whisper it) Bank of Japan has unfortunately been all too predictable. Sellers of risk peddled the line that Yellen, Carney et al now recognise how STRONG the global economy is, that they would not DARE raise rates unless the recovery was self-sustaining. So, go out and buy that risk because the market is only going in one direction.

We do need to remember that risk valuations are often based on discount rates – in short, the lower the level of government bond yields, the easier it is for equities to look “cheap”. And of course the lower the cost of borrowing, the easier it should be for companies to fund earnings growth. Mind you, things are clearly so good now that raising the cost of borrowing really wont matter will it? It’s not as if those same risk managers have relied upon (and publicly thanked) central bankers for their decade-long largesse.

But wait, perhaps the party is not yet over. Since setting up the market with a coordinated “we are going to raise rates” message, ECB, Fed and BoE officials have been back peddling faster than a Tour de France cyclist going downhill in reverse gear.

Today at 3pm is the first test, the first time we will see whether the rhetoric is matched by reality. The Bank of Canada is widely expected to raise rates. It kicked things off a fortnight ago telling us how rates needed to go up. If it does raise, then this may signal co-ordinated deeds as well as words to further remove emergency monetary policy globally. If so, judging by historic standards we probably have three to six months of risk assets doing okay. After that – good luck.

Of course, no rates increase and the party can trundle on a bit longer – albeit with an Emperor no longer naked but wearing a very small pair of pants.

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