There certainly are some economic headwinds out there, doing there best to hold things back. Let's see... higher oil prices, rising US trade and budget deficits, a Fed tightening cycle, and the ever-present specter of terrorism/geopolitical unrest just to name a few. Nevertheless, equity markets and risk premiums continue to sing "happy days are here again" no matter what the headlines read. How can this be happening?!?

...The answer is not an easy one. It largely revolves around the many years of excess liquidity creation in the U.S. economy — the repercussions of which have been felt across asset classes, and across global financial markets. Were long-dated interest rates in the U.S. in the 6%-8% band — as they were in the 1990s — it would be very hard to envisage an environment of booming credit and buoyant equity markets.

Put simply, despite a gradual policy reversal by the Fed since the middle of last year, the world remains awash with liquidity, and — as a result of this — remains largely anaesthetised against the many risks associated with investing.

It's the liquidity, stupid!