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Investors Are Flying Blind

Money fund reforms further compound problems of investor visibility, as traditionally reliable indicators misfire.

By Luke Kawa and Andrea Wong, Bloomberg | Updated on October 20, 2016

It’s not hard to see the potential flash points on the horizon: the U.S. presidential election, Deutsche Bank AG’s mounting legal charges, the day central banks stop buying bonds. Yet when it comes to gauging risks in the world’s financial markets, these days investors are flying more or less blind.

That’s because the once-dependable indicators traders relied on for decades to send out warnings are no longer up to the task. The so-called yield curve isn’t the recession predictor it once was. Swap spreads are so distorted they can’t be trusted. Even the vaunted VIX—sometimes referred to as the “fear gauge”—is leading its followers astray, strategists say.

As central banks around the world pump billions of dollars into the global economy every month and policy makers pass regulations to safeguard against a relapse of the 2008 financial crisis, the market’s best and brightest say some warning signals are flashing at precisely the wrong time. Now, rules to shore up the money-market fund industry that kicked in Friday are stifling the predictive powers of yet another set of gauges. For investors, the big worry is they’ll end up being taken by surprise when the next crisis hits.

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