Over the past couple of years, we have published a se-ries of research reports entitled "Awash with cash". We argue that the Federal Reserve's past easy policy stance has boosted the appetite for risk to a level that is unprecedented in recent history. This has had dra-matic market consequences: exceptionally low real long yields, tight credit spreads, buoyant emerging fi-nancial markets, rising commodity prices, focus on carry in forex markets and exceptionally low volatility in the financial markets "even now after monetary policy has begun to tighten."

Awash with cash' is all about falling risk premia. Lower credit spreads mean lower credit risk premiums for borrowers. Lower implied volatility in option mar-kets means investors are paid less for their exposure to sudden market movements. Carry focus in forex markets means investors receive a lower risk pre-mium - via credit spreads - for buying risky (and often overvalued) currencies. Low long yields mean inves-tors are paid less for taking the risk of higher inflation and further monetary tightening. In fact, equity markets are the only ones that are not dominated by huge risk appetite at present.

How long can it go on? In the first "Awash with cash" reports, we predicted that it might continue up until mid-2006 - or even into 2007. And it has. But it probably won't go on for ever. Tighter monetary poli-cies have begun to catch up on the markets - as the short-lived, but dramatic, market fluctuations over the summer showed us. Don't let the calm on the surface of the financial markets lull you into a false sense of security!