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Payback time

After many months of no volatility, stock markets are now gyrating wildly in tandem with a collapse in oil prices. Although painful to those heavily invested in equities, it has to be said that this is long overdue. In many senses, it's payback for years of complacency. And if you were to try and trace the source of that complacency, it'd have to be the US Federal Reserve's massive cash injections to save Wall Street when the sub-prime crisis erupted in 2008.

Those money-printing exercises were couched in all sorts of catchy acronyms which started with TARP and culminated in "quantitative easing'' or QE, a monthly bond-buying programme aimed at lubricating the wheels of the economy but one that only produced patchy results that may or may not have been the products of QE.

 Previous Fed chairman Ben Bernanke thought that as long as Wall St kept going up, this would create a feelgood effect throughout the populace, encouraging them to spend more and in so doing, push the economy onto a growth path since the US is heavily dependent on consumer spending. I never really bought this argument; maybe I'm naive but I've been led to believe that the economy has to do well first before the market can rise and to try and work it the other way around is to introduce all sorts of distortions into the asset allocation process, not to mention create many irreconciliable imbalances. And the biggest of them all was the injection of massive complacency into daily market life because with the Fed ready to print money the first sign of trouble, risk was removed. Buying Wall St stocks over the past 4-5 years has been a no-brainer, there was really no need to discuss whether cyclicals were better buys than defensives, whether technology was better than property, whether banks were better than consumer goods and so on. When investors know that there is a huge liquidity safety net on standby, there is no risk - only large reward.

Well, guess what - eventually, there has to be payback.  Russia's involvement in Ukraine was brushed off by markets as having little consequence for months but now that oversight it's coming round to bite markets in their collective behinds. Western sanctions against Russia have sent the rouble crashing and the slide has been accentuated by the collapse in oil prices. What's interesting is that the oil is falling not because supply is being expanded, it's because demand is weakening. And demand is weakening because despite massive QEs from Japan, China and in Europe, disinflation and deflation are present and their  economies are slipping into recession. Even though QE lies at the source of the market's troubles, there are calls for all central banks to step up their QEs. I'm no expert but the more they do that and the more the markets see no real positive impact on the economy from QE, the worse the situation might become.

Meanwhile, the rouble has lost 50 % this year against the US dollar despite the country's central bank hiking interest rates to 17% to try and defend the currency and it remains to be seen what spillover volatility this will bring to the currency market.

The message is simple - the no-risk environment born from QE and promises of unlimited QE has now reversed into a high-risk one where QE may not have its intended effect. It's payback with a vengeance.