I think we are about to see a massive shift in sentiment which will be manifest in global markets from stocks to bonds to currencies. This shift could be the result of a financial crisis, or could simply arise from a 'final straw' being laid atop the mountain of financial problems thus far.

Either way, the upshot will be to spur fears of deflation. Right now there's a lot of lip-service about the topic but zero genuine angst. Witness the relentless obsession with the Fed, as if whether they go 50 or 25 actually makes a difference?!!

Eventually (and i believe much sooner rather than later--call it feminine intuition), investors will realize the Fed now has only 300 bp to play with and the credit bust has barely begun! At some point, investors will do the math. Hmmm... if our financial institutions and bond insurers are already unable to function, with delinquency rates barely up from record lows, what's going to happen when things really get bad?

On the bright side, at least the fed is trying to get the credit wheels turning. In the Eurozone the ECB is taking their economy on a Thelma & Louise roadtrip. Pedal to the metal, they are speeding straight over the precipice.

Again, all of this seems patently obvious. But talking about deflation in the abstract is very different from living it. From a macro trading standpoint the standard relationships will break down. Many already have. Like bonds and gold, the yield curve... and so on. I expect the euro will soon begin to trade inversely with rates (eg., the tighter the ECB the weaker the euro, because it virtually ensures they completely disintegrate). Meanwhile, in the US, the Fed, running out of room to cut short rates, will shift to the long end and US treasuries will move well below 3%. This isn't a statement about the value of Treasuries. Heck, there wasn't any value in Treasuries at 6%!! But that's not the point.

Stay tuned, because things are about to get very very interesting.