SYSTEMIC RISK - One of the big problems in the market right now is the systemic risk associated with quantitative easing. Now that the Fed has finished its QE program, the ultra accommodative monetary policy measure has been exported abroad to a world that is battling deflation. So now you have central banks that would like to keep monetary policy accommodative to help stimulate their local economies, but at the same time, are contending with rapid currency depreciation as yield differentials narrow back in the US Dollar's favour. Some economies are better positioned than others and welcome the currency weakness (for now), while others are already on the cusp of a currency crisis. Take the recent collapse in the Ruble as an example.
EMERGING MARKETS - The CBR has been forced to adopt a tightening bias in an attempt to offset Ruble declines. But the more they step in, the less ammunition they have and the more the market smells blood and wants to test. In general, this could be a big problem for most emerging market economies. These emerging markets were primary beneficiaries of the 2008 crisis. Despite being completely counterintuitive, investors ran for safety (away from US, Eurozone, UK) in the form of higher yielding, riskier emerging market plays. This strategy paid off big time in the years that followed, but was always flawed in that the higher yielding markets were benefiting from safe haven flows. Now it looks like it is all coming full circle.
THE CATALYST - The catalyst for a big mess will most probably be a legitimate reversal in equity markets. US equities have run so far so fast on the free money central bank policy, and with the Fed hitting the breaks, this should translate into a mass liquidation. As investors start to head for the exit here, it will cause unrest throughout the globe and force mass liquidations in emerging markets. So while policy over the past several years may have delayed the blow, I suspect we are still waiting for that punch to come around. There are many out there that argue the rally in equities has had nothing to do with quantitative easing and ultra accommodative policy. I can't for the life of me understand this side, as it is more than clear these policies were implemented to stimulate the economy and bolster the stock market (this has been made very clear).
NOT A PROFIT UNTIL.. - So it stands to reason that without the free money central bank incentive, there will be a whole lot of people heading for the exits. Let's just keep it real simple. A profit is never a profit until realized. So if you have been long stocks and have made a boat load, it all aint worth a thing until you sell. And at current levels, with the record run we have seen, with the Fed no longer in the picture (or less at the center of the picture), and with the outlook away from the US less than encouraging, maybe it would be a good time to book those profits. Don't ya think? And if you say it's all about the algos, even the algos don't make until they book. I think everyone is gonna head for the exit all at once sooner than later, but this time, we won't get that rebound, at least not for a long while.