Complete Currency Carnage...

With the world's oldest central bank - Sweden's Riksbank - taking the plunge into negative rates, there have been 19 'eases' by central banks this year, Morgan Stanley warns of "ghosts of the 1930s."

As you are doubtless aware we are living in a new paradigm – the age of global QE has arrived. Amongst the major power blocs it started with the US, spread to Japan, which adopted it with a particular gusto, after suffering from deflation for decades, and just has been taken up by Europe in a big way, after waiting for half its young people in many constituent countries to become unemployed due to the ravages of deflation. Smaller countries will have to join in or their currencies will soar and they will become uncompetitive.

It is vital to understand that, having become a universal policy, QE is here to stay – this is a genie that can’t be put back into the bottle. The reason is that any attempt to reverse course and rein it in would quickly lead to soaring interest rates because of immense debt levels, a global market crash and a liquidity crisis, in other words a deflationary implosion. Another important to note is that in this “Golden Age of Fiat” where money does not have to be backed by anything and where our masters are accountable to no-one, they can indulge in as much QE as they like.

"I think equity markets will get devastated," warns famed $12bn AUM hedge fund manager Crispin Odey in his latest letter to investors. Having been one of the biggest bulls of this particular central bank artificial-bull cycle, his dramatic bearish tilt (as we discussed what he thinks are the biggest risks underpriced by the market previously), is notable. Finally, Odey fears major economies are entering a recession that will be "remembered in a hundred years," adding that the "bearish opportunity" to short stocks looks as great as it was in 2007-2009.

The painful irony is that central banks may have brought about exactly what they most feared by trying to keep growth buoyant at all costs, he argues, and not allowing productivity gains to drive down prices gently as occurred in episodes of the 19th century. "They have created so much debt that they may have turned a good deflation into a bad deflation after all."

Congratulations to the doughty Swiss, we say. The decision of their central bank to remove the cap on its currency, allowing it to soar against the Euro, is causing the foreign exchnge markets to be struck with the dreaded turbulence. It may well make things difficult for Switzerland in the short run. But it was a vote of no confidence in the quantitative easing that the European Central Bank is about to undertake. It may have put some starch into the Germans, to whom the ECB just bowed by saying it will do its quantitative easing without making taxpayers responsible for losses.

In the coming days and weeks there will be more fallout from the SNB disaster. There will be reports of big losses and gains from today’s events. But that is a side show to the real story. We have just witnesses the collapse of a promise by a major central bank.

We’ve just taken a huge leap into chaos. The linchpin of the capital markets has been the trust in the CBs. The market’s anchors have now been tossed overboard.

Stunning monetary-policy shifts in Switzerland and India sent markets on wild rides, highlighting Federal Reserve Chair Janet Yellen’s November warning that “normalization could lead to some heightened financial volatility.”

The Netherlands (and likely Germany as well) made concrete plans in 2012 to switch to a new currency in case the euro would crash. Not long after the emergency currency was ready the Dutch began repatriating 122.5 tonnes of gold from New York. This can be very important as there is a possibility the Eurocrisis will ignite again. Monday we learned Greece will have new elections on January 25 that could bring the anti-bailout Syriza party to power, risking Greece’s membership of the Eurozone.

Lots of red on the board.