Risk On- More Risk On

We were waxing nostalgic recently for the bygone days of risk on-risk off. Our affinity for such periods does not stem from some kind of masochistic love for extreme volatility or a desire to feed our inner trader, but rather we miss the days when people actually gave some credence to the latent risks that still exist out there. While markets may ” climb a wall of worry”, todays’s markets prefer to leave the worrying to the Central Bankers and focus solely on the climbing part. It never ceases to amaze us how quickly perception changes in markets. It seemed like only yesterday we were dealing with a budgetary crisis which threatened to push us into another recession. However, today I read an analysis which argued that the Treasury  Market, and the economy,  should be able to withstand any Fed tapering given the shrinking budget deficits. While it is true that the sequestration has allowed both sides to make progress on the budget, it was only supposed to be a stop-gap measure designed to get both sides more actively engaged. In fact, Moodys just commented on the lack of real discussions, saying that the U.S. is risking another downgrade if no real progress is made on budgetary talks. While a downgrade may be irrelevant in a world where the Fed is the largest captive buyer, we assume that this will matter at some point to non- Central Bank buyers.  It is curious that the more voluminous the talk on deflation becomes, the more amped up the capital markets become. We wonder whether these same markets truly grasp what the ramifications of a deflationary spiral would mean,  particularly in the context of a still over-leveraged global economy.