This Week: 4 C’s That Could Change The Financial World As We Know It. Again!

Those 4 C’s are: Confirmation, Crisis, Contagion, Catastrophe.

What type of confirmation could send the financial markets into such turmoil it could rock the very bastions of finance as we now know it?

First: Scotland votes yes to leave the U.K. If this turns out to be so, it could send shock-waves throughout the markets that run the world. i.e., Forex or World currencies.

No one with any financial acumen can look seriously at the markets as they stand at the time of this writing, and seriously argue the markets are prepared for such a resolution happening this Thursday.

If Scotland truly does vote Yes and confirms independence from the U.K. the initial shock-waves in my opinion that will hit the markets will be akin to the video we’ve all seen 1000 times when a nuclear device is unleashed with a house being obliterated. Or, the one where trees are bent over near flat to then reverse back the same.

In my humble opinion this could be a metaphor of what could take place. The reason is simple: By proof of the markets as they stand today, it is proof prima facie that everyone (especially so-called “smart crowd”) thinks it won’t happen. And the odds via polling alone show it to be the equivalent of a coin toss!

If this happens it will also confirm something just as real, and quite possibly far more instructive: With both a Federal Reserve meeting being held just days prior to such an event, the language out of this meeting could not be more important.

If it’s some revised boilerplate “till conditions improve, extended period, blah, blah, blah” based press release and conference, it will again confirm what many believed from the start, The Fed is both deaf, blind, and ill prepared to handle what might be an event such as this. An event that has the potential to make the crisis of 2008 the equivalent of a firecracker as opposed to what might be unleashed if Scotland does indeed secede.

The ramifications are truly unknown, unquantifiable, and what might be worse – unmanageable.

Then we move to crisis.

Just how does the Federal Reserve handle such a dilemma of this scale? I use the word “scale” for good reason. As many may know the Forex markets dwarf what the lovingly referred to as “mom and pop investor” believe it to be.

The saving of the “stock market” (aka the Equity Markets) in 2008 vs a Forex market crisis is the equivalent of bailing out a local bingo hall as compared to dealing with such a crisis on the scale of Las Vegas casino.

If the Forex market suddenly gets rocked with a clear fundamental breakdown and breakup of everything now known as the E.U. Along with all the tentacle entangled carry trades? Crisis might be an understatement.

Contagion across the Forex exchanges will not only wreak havoc from within it will also spread directly to the Bond markets. (which many don’t realize is also considerably larger themselves than the equity markets)

Such sweeping turmoil will most assuredly plunge the equity markets themselves into complete and utter chaos as money managers, market makers, margin executives and more decree: “Sell Everything, Close Everything, Now!”

What chaos might also be unleashed as the High Frequency Trading (HFT) algos are set loose selling anything and everything into a market where it’s suddenly revealed via news reading computers that the jig is up?

Or, what no one ( and I mean no one!) thought possible till this week. What if this was the week HFT decides to not skirt the laws, but to now – obey them?! i.e., CME Rule 575 as explained by ZeroHedge: These Kinds Of Market-Rigging “Practices” Will No Longer Be Allowed On The CME

 This could make the current Ebola crisis and concerns about the speed and severity of contagion look like the sniffles in a Kinder Garden class.

The panic, fear, mistrust, alienation, ___________(fill in the blank) that holders of what once believed were liquid assets on their books will find out rather quickly nothing runs quicker down the drain than paper gains and wealth.

If all this plays out, what will follow will be a blow to the IPO market and all it has morphed into these last few years with “free money.” So much so that one will think they actually saw Thor’s Hammer. Alibaba™ stands to be “the” poster child for top ticking headlines like never before.

Friday their stock hits the market in what has been touted as one of the most sought after and highly demanded offerings. So much so that they were able to wrap their road show early.

All this in an era of low if not non-existent GDP figures of recent memory. Along with real unemployment, and other metrics screaming recession, however these are adjusted, tweaked or adulterated so much so – it would make a vocal harmonizer jealous.

If Alibaba finds itself trying to release an IPO in this potential melee it will have ramification not only for its own offering, but for every single current high flyer in the markets from now until who knows when. The issue is not just if this happens, but what happens for everything else -if?

A catastrophe is quite possibly in the making. But it is still all in the hands of nothing more than the odds in a flip of a coin. We’ll know more Thursday when Scotland votes. Until then what we truly know is less about what if, and more about – if not.

However we do know a couple of things today that we didn’t know just 5 years ago.

First is, we understand the markets are not what people think they are. Second, the Fed. is not as omnipotent as most believe. Third, 70% to 80% of what the “mom and pop” 401K holders think are trades in the markets, is an illusion. Fourth: Everyone, including many of the very professionals that work and breathe Wall Street have learned absolutely nothing since the Lehman crisis.

And what’s maybe more important than all of those combined?

They believe the chances of it repeating are not only nil, they’re betting it wont. Besides they still believe: “The Fed’s got their back!”

Problem is – will the Fed. be able to save its own rear end if it does happen? Let alone theirs.

We’ll know soon enough.

© 2014 Mark St.Cyr