A good friend and FX professional just asked me whether the FX market was going to die in next 10 years (his retirement horizon) - possibly due to excessive policy accommodation. Below is my response:
I think market will get VERY interesting; we are headed for disaster; 2008 was just a precursor. History rhymes, and the current developments are eerily similar to 1930s. The U.S. is losing it's global reserve currency status and global hegemony at the turn of the 21st century, similar to Britain's experience at turn of 20th century.
China is seeking natural resources in other countries, much the same way as Japan in 1930s, while Russia is looking to reconstitute it's dismembered USSR empire, just as Hitler tried to do with Germany in 1930's. NATO and the UN appear just as ineffectual as France and England (peace in our time) of the late-'30s.
The Dow Industrial Index has risen the past 6 years on the back of stimulative fiscal/monetary policy as happened after 1929. The second crash in 1937 followed 8 years later as policy tightened; A 2nd depression also occurred in 1937, five years after the 1932 one.
As to tightening policy, the OIS forward market prices the first Fed hike in late 2015, 6yrs after 2008. Obamacare is due for full implementation 2017 - 9yrs after 2008. The policy is likely to have a chilling effect on business investment and consumer spending due to health insurance rate hikes.
World War II followed developments of 1930s as economic pressures created increasing nationalism. We're seeing a similar rise in nationalism in the U.S. and throughout Europe.
Outperforming investments in such an environment will likely include precious metals as the U.S. dollar's reserve status is called into question, sovereign bonds as countries seek to maintain low interest rates to reduce borrowing costs. Risk assets like high interest rate currencies and stocks are likely to underperform on reduced international flows and risk aversion.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.