Cat's Cradle

The Federal Reserve spent seven years using extraordinary policies to stabilize markets and prevent economic collapse. It worked. The markets stabilized. But something irreversible happened in the process. Price discovery broke. Liquidity evaporated. The very mechanisms that allow investors to make rational decisions about value became subordinate to central bank intervention. Now even Fed officials are admitting the entire framework of normalization and rate guidance is a charade. The system was saved but remade into something that can never function normally again.

• Central banks have obliterated the focal points that coordinate investment decisions. When the Federal Reserve dominates markets with infinite buying power, the price of an asset stops reflecting its actual value and starts reflecting the Fed's next move. Security selection becomes a moke's game.

• The regulatory machinery meant to prevent another crisis has created a different kind of trap. Banks can no longer hold inventory or make markets without career-ending risk. A handful of online polls or betting odds can trigger flash crashes in currency, rates, and equities because the backstops are gone.

• Money market funds are about to charge savers interest for the privilege of holding cash. TIAA-CREF has already announced it's ending fee waivers. When negative rates hit U.S. money markets, the entire concept of compounding gets inverted from wealth creation to wealth destruction.

• The Fed itself has admitted forward guidance is counterproductive and the promise of rate normalization is false. St. Louis Fed President Jim Bullard's latest paper says the FOMC's four-year strategy of communication and dot plots is a waste of time unless some external shock reshuffles the regime.

• We're all trapped in a political equilibrium where the cost of changing course is so astronomical that no one will change course. The Powers That Be created this low-growth, high-debt, negative-rate world and now they can't escape it without admitting the original emergency policies failed.