Here’s an article from the Financial Times earlier this month that pretty much sums up the current state of the global markets. I think an easy way to envision our global financial system (a credit-based fiat system) so that it’s easier to understand is to think of it like a balloon. When credit is easy and liquidity is being pumped into the system, the balloon expands (asset values rise). As long as the system can maintain inflation and ever-increasing credit, everything is peachy. However, if credit begins to contract, which can happen for any number of reasons (higher interest rates, stricter regulations, higher taxes, less business expansion due to a lack of confidence or clarity in the economy, etc.), then the balloon begins to deflate and asset values fall.
There’s also a documentary that came out a couple of years ago called Money for Nothing: Inside the Federal Reserve, which does a great job of breaking down and explaining how our financial system has evolved to the point that is today and the major role the Fed has played in distorting the markets. I highly recommend it for anyone looking for a better understanding of things. You can rent it on Amazon for $4.
Lastly, for anyone interested, here’s the letter I sent to my clients at the beginning of the year which also discusses many of these global macro concerns.
-Nick