CHAPTER 16Dropping Acid in Disneyland: Thoughts on the New Normal
Finance is behaving psychedelically because asset correlations increase market crashes and stresses. Looking at the tapestry of cash and synthetic assets sheds light on the boom and bust cycles of the vernacular “new normal.” This characterization provides clues about the nature of its endgame and progress toward that end.
• Economic growth fueled by easy monetary policy leads to excessive investment in specific assets (bubbles), resulting in more extreme boom and bust cycles.
• Government policies to regulate the cycles lead to further crises that affect higher levels of capital structure.
• In particular, very steep yield curves result in a generalized carry trade.
• Equity valuations ...