I’ve said a few times in passing that the markets are no longer free.
Free markets are of course meant to be a tenet of capitalism so the suspension of free markets should be hugely significant.
However it probably isn’t because capitalism as most envision it may be long gone in any event.
Of course there should be some debate about whether markets are free anymore but I feel the manipulation of interest rates to near zero is in itself sufficient to make this case indisputable.
Interest rates drive everything. They drive bonds and currencies the two top markets.
The moment the state pulls them about for its own end against market participants the freedom of the market is diminished.
QE and its associated policies through economic linkage have manipulated all markets. They are meant to.
For most of us, central banks have fixed things in a good way.
Anyone with borrowing or stock should love this manipulated market.
I’m not going to hate on this situation instead I want to know ahead of time when it is breaking down, because that day, for better or worse will come.
In this month January 2014 we are having a series of bearish days. Is this the end or just another of many bumps in the road?
We all need a signal.
The signal is currency.
The core manipulation of the modern era is the fixing of interest rates, bond yields and the manipulation of exchange rates. Interest rates, currency rates and bonds are all tightly linked. . All market moves are emanating from this.
Currency must be held in line when interest rates are being fixed because a dramatically devaluing exchange rate in any one major economy can set of a chain reaction leading to high inflation, high interest rates and even sovereign default all round. With the west carrying unprecedented levels of sovereign debt, this is a high stakes game.
Its therefore critically important that no state with huge budget and fiscal deficits rock the currency boat, at least not too hard.
So like all manipulations, when they work, life is good and business is smooth. Gone is the jagged risk of volatility.
Yet when the game comes undone, things can get nasty. If you look at the developing world for examples, it can get very nasty indeed.
So its good to have a sign to watch out for to indicate things are going wrong. Sudden forex instability is such an early warning signal.
The end of current market stability will be heralded in by sudden unexpected forex moves, but right now they are nowhere to be seen. Nonetheless if they appear, investors need to consider de-risking.
The Euro crisis was a huge uproar in 2009. However as I kept saying at the time, “the euro is strong, therefore Euro crisis isn’t real.” Of course it wasn’t about the currency it was about intra-european fiscal profligacy and German intransigence, but the strength of the currency signalled nothing bad was going to happen. It didn’t.
The current era of global economic realignment doesn’t have to come unstuck. It can Segway into a new structure and it may well do that. This after all is what the ”taper,” is about, a slow transition to the old ways. However if currencies start to move erratically you should look very hard indeed for major problems ahead, because one thing is for sure, the central banks of the west are playing a dangerous and delicate game.