It seems that we are now entering a twilight zone across our global financial system. Long held certainties such as higher investment returns for higher risks, notion of rewarding savers and even that econ 101 principle of present and future value have literally disappeared from the consideration of global financial policy makers.
It almost seem like our world is turned upside down and very few people seems to see it and understand will be the ultimate implication of these policies.
There is no doubt in my mind that we are on the brink of a significant market correction and when that happens, its effect will be compounded by inept central bankers who will find that they have no more tools left to soften the blow.
When this happens, I believe we will see two effects in the markets; firstly, wholesale unavailability of finance and as this takes effect, we will see the demand curve drop precipitously in the developed markets causing significant deflation from which it may take years to recover.
I disagree with many commentators who speak about hyperinflation because for that to happen, one needs finance but without finance, there is no money chasing fewer goods to push inflation higher.
It is interesting to see that the S&P 500 continues to act in the same way as it has done for many years particularly with regards to the correlation between it and the yen as the chart below shows.
It seems that the market is taking these ground breaking changes in the very foundations of how finance has been done since the 14 th and 15 th century.
It seems like the markets has now realized that it is in the driving seat of global financial policy making whereby the central bankers are watching what it does as a guide to what it should do instead of the other way around where the central banks considers the whole economy and seeks to constantly acts as a counter weight to calm market over exuberance.
It is unclear what is the philosophical underpinnings of this new style of central banking; some have suggested that it is neo liberalism whereby decision making and control is being left to the markets themselves with the ludicrous idea that traders will see an arbitrage opportunity to make millions and refuse it because they suddenly remember von Mises and Hayek's admonitions for them to show self-restraint for the health of the market.
This is not only a foolish notion but it is also an extremely dangerous one because people are fundamentally selfish and self-interested and without an external restraining force guiding, regulating and reprimanding, there is no doubt that the markets will be driving to extreme levels and ultimately collapse.
As a trader and part time philosopher, I understand that it is extremely difficult to be a participant in an activity and still maintain an objective perspective. Traders and financial market participants are paid to be buyers and sellers of securities and as a result, they will continue to buy and sell whatever the price of the market.
As far as traders are concerned, the market is neutral and their main motive is profit. When one understands this, it makes the actions of central bankers less understandable especially when it comes to destroying the only real market barometer of restraint which is the pricing of risk.
Nevertheless, the answer is very obvious. When we hear about how well capitalized our global banks are, we must ask ourselves; by whose standards are they deemed to be well capitalized. Despite the central banks making noises about further break up of banks, it is simply the rearranging of deck chairs on the Titanic as the ship is sinking.
It is important to note that this will not simply be a financial crisis whereby some banks will survive but rather it will be the collapse of global money and money instruments.
This is precisely what the central banks are trying to avoid by seeking to continue recapitalizing the banks through the back door with QE and NIRP and all the time knowing that they are injecting more poison into the system to the point where the poison has infected every asset class from forex, commodities to bonds and equities in every part of the world.
This is why we continue to see huge distortions in the financial markets. While the music is playing, everyone is still dancing but markets will only begin to correct in response to a significant trigger particularly at the point where fresh funds needs to come in to maintain the system.
So, for example when the financial crisis took place in 2007-8, buying and selling continued up to the time that it became widely known that homeowners were not paying their monthly mortgage payments. This was a disaster because it threatens the cash flow on which numerous financial instruments were created to satisfy various investors.
In the same way today, it is possible that this could be the trigger again or perhaps the current challenges in South America particularly with Brazil and Venezuela and of course Argentina still in the critical ward.
In this highly sensitive environment, normalizing macroeconomic policy will be tantamount to suicide for central bankers as it is challenging to see the full potential impact of this policy especially with regards to how assets will behave in relation to each other.
In conclusion, I do not see the central banks changing policy anytime soon simply because they cannot do so without collapsing the global financial system especially as it relates to how much already cash strapped governments and banks will pay for their bloated liabilities.
My advice to investors is to begin to convert holdings into cash, we are seeing the markets peaking and as wise investors, the object of the game is to exit at the highs because as soon as it is known that the Emperor has no clothes, the markets will begin to drop very quickly wiping out gains won over many years.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.