Macroscope | Markets priced for perfection imperiled by rising risks

Global asset markets are priced as if the world economy is in a perfectly upward trajectory, but a rising raft of risks suggests the best bet for investors could be on a secular recovery for the safe-haven US dollar.

The threat of a protracted economic slowdown, gnawing geopolitical tensions and an imminent end to easy money are there for all to see. Markets can only shrug it off for so long.

Market fear gauges like the VIX volatility index have begun to trend higher from historically low levels. Investors should be looking for higher returns to compensate for implied higher risk. Instead, complacency seems to have set in.

The world's major stock benchmarks are locked in a five-year rally and US Treasury bonds are charging along in a 33-year super bull market. That has encouraged investors to turn to more esoteric assets to boost returns, such as commodities, exotic derivatives, structured products and hedge funds.

It is no surprise that the likes of the International Monetary Fund are warning about excessive risk taking in financial markets.

The world's major central banks are getting nervous, too. They have craved a return to healthy and exuberant markets since 2008 when they were forced down the path of unconventional monetary policy and quantitative easing. That would signal a return to more normal economic conditions.