Over the past weeks I have been predicting a renewed shock to the financial system. It became clear that bad economic news will move market participients out of their positions. Some will just realize their gains and wait along the sidelines. But sitting on cash they would have to think on how to reinvest their money, which is the largest challenge in the face of missing alternatives. What the market face right now can be described indeed as a run on the FED.

Mistrust took over and monetary policy has lost its magic. The best case for the US could be a Japan like deflation and lost decade like scenario. We explained at earlier, why this is not likely. There are no productive capacities in the US. Dr. Doom Mark Faber has a very matching metaphor to describe the US economy. Loosely quoted: "It’s basically personal-attention-services and beer." With high wheat prices, even beer-brewers might face issues.

Let's make an excercise to describe the current situation without emotions: How would one describe the state of the US economy, looking back ten years from now?

The Fed’s last statements confused investors in the search for certainty. Only one thing can be granted for sure and that is the Fed will continue to buy government bonds. But even with this knowledge at hand stock market plunged 256 points. Investors should have asked themselves what they expected from the FED. Even Bernanke is limited in printing Dollars, if nobody wants them!

Investors and analysts now starting to compare Japan and the US, but this is a rather wrong comparison of peanuts with elephants rather than a comparison of apples and pears. Japan had a budget surplus, a trade surplus and a culture of saving. In the US we don’t have that luxury and the starting conditions within this deflationary crisis are such very different. If deflation will start to occur in the US, then situations will be very different to the Japanese crisis.

This should not come as a surprise. US consumers have continued to spend their way out of the recession with the idea to compensate for losses in productivity by just buying more. The trade deficit is increasing again and China is the favorite supplier.  What happens here is an outsourcing of efficiency and taking the credit for it. It is similar to the idea of producing and selling a good below cost and trying to compensate the losses by increasing quantity.

The news that the wheat market might be hit by a declaration of force majeure was not unexpected, but it might trigger a variety of consquences.

With Russia's ban of exporting wheat, the world is facing a 20 percent supply shock. On top of that Canada has been reported to have had a reduced harvest. In a globalized world with trust in the financial futures instruments the consequent default is eventually also changing the perspective of those who seeked to hedge risks.

The risk to hold physical delivery at a fixed price in ones hand has come to an end. The price of wheat might increase further and along with it the price of many other agricultural commodities. While the supply is decreasing, we have an ever increasing poulation. This are two trends which currently face opposite direction. Within the middle of the sudden change of direction we might be faced with a very inelastic supply curve and demand does eventually not change from one day to another.

The world economic situation is changing rapidly. Various indicators seem to indicate that we have reached pre-Lehman levels. Very concerning are indeed the signs from capital markets where a shrinking liquidity has not yet found a way to adjust price levels.

The world has now to dicount further risks, which investors seem to ignore in the hope that after three years of crisis thing will get better. It reminds one those great Alfred Hitchkock movies, where the suspense is build over time and then while the viewer is expecting the worst is allowed to decline slightly. Off course then the "action" starts as surprise which causes the shock effect to the viewer.

Investors now seem to start invest in markets which under normal conditions nobody would  eventually consider as investment opportunity, such as the Australian housing market. Price increases over the last years of over 20% annual, reveal that there is an issue, but the argument is about the same as in other economies. "The story will go on, for quite a while and chances that oneself get wiped out seem to be low"

As souvereigns can no longer bail out the system with borrowing, it is clear that the end of a currency life cycle is closing in.

1. The EU most likely prepares for Greece insolvency
2. A haircut to greek bonds will be required in this case. Most likely is Greece to leave the Eurozone and the best option then would be to lower Greek interest rates to zero or to denote Greek Euro denoted debt in the new currency.
3. A deflationary shock is ahead, most likely starting in the US markets.
4. Commodities seem to be the best capital preservation option, but the downside risks are enormous as forced liquidation will most likely kick in in this case.
5. Currencies are risky assets as souvereigns all over the world have strechd the debt game to far.
6. China is decoupling and does not require exports to sustain growth
7. Tradig lessons learned: DO NOT BUY ANYTHING WHICH HAS an AAA rating!