The State of the Financial Markets

Don’t fight the Fed.

Or, don’t fight the global central banks.

Since the market crash of 2008, central banks have been instrumental in propping up the world economy through creative monetary policies. Japan has used monetary policies to keep their economy afloat since 1990. Even though their Debt to GDP is over 200%  – double the size of the US – they seem to be ok for now.

What could trigger the next crash?

Another Lehman Brothers, or a Puerto Rico type bankruptcy. The risk that US investors face are the high correlated assets created by the arbitrage of high frequency companies. Diversification of risk can be mitigated by these companies when another event occurs; they will cause most assets to go in one direction – and that is down.

If enough damage is created by these type of companies, legislation – although too late – will be implemented. The SEC or government agencies are always slow to act. The Bernie Madoff debacle is a perfect illustration of this incompetence.