Markets dance to the tune of easy money The Yellen put is proving to be even more seductive than either the Bernanke or Greenspan put. With the expiry of the debt ceiling just days away (possibly), most market players are focusing less on the prospect of a default on government debt and the possible questioning of the dollar's reserve currency status and more on the fact that quantitative easing is alive and well. It is as if Bernanke's statements on tapering on May 22 and then again in June had never been uttered. Mentally, it is May 21 once more. US equities are near their all-time high, rallying 2.2 per cent on Thursday to stand just 33 points off September's record closing high of 1,725.52. Indeed, the only market with any visible sign of jitters was short-dated Treasury bills, which sold off as players in the short-term funding markets declined to accept Treasury bills as collateral. The benchmark 10-year Treasury has barely moved, though. Every time hedge funds and other investors have positioned themselves defensively, cutting back on risk in the face of uncertainties, they have regretted their prudent stance. They, like Chuck Prince, the hapless former chief executive of Citibank, have concluded that while the music is still playing they might as well keep dancing to the tune of easy money - which means staying long US equities. The mood, in other words, is very different than it was just over two years ago, the last time the debt ceiling was an issue. Since that time, the Fed has been far more explicit in its language on low rates. The markets have now accepted the circular logic of the Fed, which is that a whisper of the prospect of tapering leads to financial conditions tightening which the Fed then cites as the excuse not to taper. Indeed, this week Goldman Sachs put out a report reiterating its belief that the Fed won't raise rates until 2016, suggesting well over two more years of liquidity and rising asset prices. And of course, it isn't just the Fed that is doing its bit for asset price rallies. There is talk of another round of easing in Europe, the BOJ continues on its aggressive easing and Australia has just cut rates. Thanks to these policies, hedge funds are sanguine. Two years ago, they weren't in good shape. But today most funds, whether long short equities, or macro, are sitting on real profits and feel they can afford to take even more risk, because that is what they are being told to do by the central banks. Who wants to fight the Fed under these circumstances? "The Fed is always there," says one Hong Kong-based hedge fund on the sidelines of the Goldman Sachs hedge fund conference in Singapore earlier this week. It is clear that it will not tolerate a decline in asset values. If you sell in the face of QE, you look like an idiot. It is possible of course, that all this is a huge miscalculation. It is obviously foolhardy to count on the American Congress to do the right thing. Market complacency has proved erroneous in the recent past, most notably when the markets expected the government to bail out the bigger, more systemically important Lehman Brothers, six months after it orchestrated JPMorgan's takeover of ailing, over leveraged Bear Stearns. It is possible that as the game of chicken continues, the overnight and other short-term funding markets will start to seize up. It isn't clear whether money market funds will have to say mark down the value of their holdings of four-week Treasury bills that nobody wants to accept as collateral for fear that the situation won't have been resolved by the time they fall due. The lack of concern is also partly because the markets are not very good at assigning probabilities to the risk of default. With most risks, it is possible to calculate a price and then discount the present value of that asset given the likelihood of a given outcome. But the uncertainty of a default, with its stark binary outcomes, is harder to assess. In the long term, the spectacle of the political wrangling in Washington will lead to a renewed discussion of the need for a world with more than one reserve currency. But at the moment, the world seems resigned to the lack of credible contenders despite the music - and the noise - emanating from the US.