how is capital priced? in other words what is the price of ownership. in traded capital markets there are two types of products one is the bebt and the other equity. the prices of these assets depend on severl things but the most important ones are the future cash flows of the asset, the interest rates and the risk(the probability of an unexpected event) of the asset. of late the global equity markets are booming with higher growth rates in GDP, higher profits and increased liquidity in the global markets. however this trend seem to be reversing with record oil prices and monetary tightening by the centra banks around the world. the entire events that have taken place have been explicitly explained by Paul Mccully

With policy makers removing sources of volatility risk from markets, actual volatility falls, which like gravity, pulls risk premiums -- the market compensation for underwriting volatility -- lower. More specifically, P/Es rise, term premiums narrow, credit spreads tighten, and implied volatilities in options fall. As this process unfolds, the forward-looking return on risky assets falls, but their real time actual return is heady, as lower risk premiums are capitalized. This is a perfect prescription for bubbles.

Well said. The real time return -- not the forward looking compensation for taking risk -- may have come to dominate too many (financial) decisions. I am one of those curmudgeons who thinks a more unbalanced world will likely prove to be a more volatile world. We will see.