What Will Happen When the Markets Crash?

What will happen when the market crashes?
This has as much to do with the currency markets as it does equity markets, because when stocks begin selling off in a fervor led by high frequency trading (HFT) algorithms that jump in front of orders and accelerate the sell off, the currency markets will follow suit. What does this mean for us the FX market? The textbook answer derived from the crises last year is that when the stock market drops money will flow into the "safe haven" currencies such as the USD, Yen, and Franc.

However, since the market last had a substantial drop the possible scenarios of what might happen in the event of a future sell off have changed dramatically due to recent actions taken by central banks. The question that needs to be asked is: in the next major crisis, will the safe haven currencies of choice be the same as last year? We don't think so.

When it comes to the Yen, why would investors choose to put their money into a currency that they know the Japanese are dead-set on destroying? Various market participants have told us that Japan's economy will ultimately implode, with Kyle Bass's prediction of this event happening 18 to 24 months from now being a fan favorite.

The Swiss National Bank has been directly intervening in the FX market to keep their currency weak and has even gone so far as to have some Swiss banks implement capital controls (customers are CHARGED interest rates on their deposits.)

That leaves the U.S. Dollar. With quantitative easing expected to come to an end in 2014 and interest rates set to rise sometime in the next 12 months after that, we believe that the U.S. dollar will be the primary beneficiary of the next crisis.


So when will the markets crash?
Trying to call the top or bottom of a market and trading it before receiving confirmation from price action is one of the most common ways traders lose money and/or blow up their accounts. My philosophy for trading turns in the market is simple: if I know what I'm looking for when a major turn in the market happens, then I'll know when I see it. Playing a move prior to letting price action confirm my hypotheses has rarely ended well for me.

So for everyone frantically trying to call the top of this market on CNBC, please just chill out. When we get a large exogenous shock, whether it's from political BS in Washington, people realizing the economic reality of the continuing Eurozone crisis, or Israel taking out Iran's nuke sites, it will show up in price action. Trying to trade an event that may or may not even happen is gambling. It's not trading.