Exuberance maybe irrational but could still be right.

Lack of volatility is the biggest danger to stock markets, wrote Dean Curnutt. Many events that would have resulted in a significant fall in share prices are being shrugged off. North Korea testing missiles, a recent cyber attack affecting over 100 countries, and Donald Trump's troubles at home would have caused prices to fluctuate widely in normal times but now they cause hardly a ripple. "Of all the dangers in the world of finance, the enduring low levels of market volatility is the most significant. How quiet is quiet? Recently, the six-month realized volatility for the S&P 500 dipped to 6.7%, lower than even the period leading up to the financial crisis of 2008-09." Why is it dangerous? "The result is an inability to appreciate how quickly marker conditions can change, especially as trading strategies that capitalize on quiet markets become vulnerable to unwind, serving to amplify a risk-off event." Prof Nouriel Roubini enumerates a list of global events that could trigger a crisis, but are being ignored by the markets. Several wars are being fought in the Middle East but there is unlikely to be any shortage of oil. Economies which are not growing, such as Russia and Ukraine, are not large enough to cause market disruptions globally and there is no prospect of a war between major powers. But, perhaps, the biggest reason is huge flows of money into funds. "They simply put the money received to work in passive fashion, without evaluating the risk/return trade-off. The flows themselves are a factor in the positive returns and the low volatility that, in turn, attract additional flows." So, it is the money going round in circles that is supporting the stock markets. What happens if the faucet is turned off? The Federal Reserve, has been too timid in raising rates, which has built up an asset price bubble and will result in a bust when monetary policy catches up, wrote VA Nageswaran. David Rodriguez, warns of warning signs flashing over both the Dow Jones and the S&P 500 as retail investors are selling out. The stock markets in India are also at record levels. The economy is growing at over 7% so there is nothing to worry about. The high value of our stocks is because of very high global liquidity, wrote Nageswaran. Indian banks are weighed down by bad loans which means they are unable to lend for new projects. Many banks are hiding the severity of their problems, wrote Andy Mukherjee. We make better decisions because we are irrational, wrote Olivia Goldhill. But markets are supposed to be rational, so what happens now?