Markets have become conditioned to rely on comforting stabilizers.

• Author: El-Erian, Mohamed

Market measures of financial volatility have plunged to two-decade lows at a time of "unusual uncertainty" for the world due to economic, financial, geo-political, institutional, political, and social factors. It is a notable disconnect that adds to the list of inconsistences for a global economy and markets that are becoming harder to predict. Fortunately, most of these can be favorably resolved through an appropriate domestic policy response and better multilateral coordination. That is the good news. Less good is that policymakers may not have as much time as their revealed preference may suggest.

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In the first week of May, when this was written, the media was consumed by nuclear threats from North Korea, the leak of strained Brexit conversations between the United Kingdom and the European Union, mounting speculation about the direction of an inquiry into alleged Russian meddling in the U.S. elections, threats of populism and anti-globalization nationalism, and inconsistent signals from economic data, including an ever-widening divergence between "soft" and "hard" data. Yet the VIX, or what is commonly referred to as the markets' "fear gauge," fell below 10, a level last seen in 1993. This followed a bipolar International Monetary Fund forecast for global growth pointing both to better baseline prospects and higher downside risks. And all added to puzzles about what to make of all the competing signals from the market for equities, suggesting a pickup in growth and corporate earnings, and that for government bonds which signalled a considerably more subdued outlook.

Long conditioned to ignore not just inconsistencies but, also, the growing list of realities that were deemed improbable not so long ago, equity markets have marched higher around the globe, with some (such as the NASDAQ and S&P 500) recording new highs--an outcome that, rightly, has led some central bankers to warn markets about excessive risk-taking, albeit to no avail. Meanwhile government bond yields have remained unusually low, brushing aside not just equities' excitement about growth prospects but also signals that the Federal Reserve is serious about delivering on its guidance for higher interest rates than what is implied by markets.

It is not that markets are misinformed about the unusual fluidity of the global economy. After all, who can avoid all the media reporting about rather bizarre politics and geo-politics? Rather, they have been...