This gargantuan sum of hot money, every bit of which has been given to us by the Federal Reserve and the Bank of Japan, is a rolling juggernaut that crushes whatever is on the other side of it. Whether it is exiting a market or entering a market, its appearance produces all manner of price distortions, both on the way up and on the way down.

Eventually, the fundamentals reassert themselves however. They have to or the paper market ceases to be of any value in the real world whatsoever. Remember, there are thousands of commercial entities that must rely on that paper market to hedge both long and short positions as part of their overall risk management programs. Wild swings in price, disconnected from reality, destroy hedges put in place by commercial entities because MARGIN requirements, though lower for bona fide hedgers, still must be met EVERY SINGLE DAY at the settlement process.

A hedge position can thus be blown to pieces by this sloshing wave of speculatoractivity requiring large margin calls and causing financial duress for a commercial hedger. This defeats the very purpose for which they employ the futures markets in the first place, THE MITIGATION OF RISK. The last thing any entity engaged in the use, production, selling, purchasing, etc., of any commodity wants is to stay up nights losing sleep over fears of an obliterated hedge position.

If the paper markets become so volatile and so disorderly, eventually these commercials will begin to look for other mechanisms to offset risk other than the futures markets. This will reduce the size and scope of the commercial participants in these markets leaving them more and more to the speculators. The problem with that is that this crowd, thanks to the algorithms, tends to move to the same side of the market, meaning that there will be fewer and fewer large traders to take the other side of their trades. Can you even remotely imagine what that will do to market volatility and to the eye-popping, stomach wrenching price swings??? It will for all practical purposes, render many of these markets untradeable.

I will go on record here and now stating the NUMBER ONE SOURCE OF MARKET INSTABILITY is the zero interest rate policies of the Western Central Banks, (and the Bank of Japan). It is these institutions which have created this gigantic pool of hot money and who continue to increase it month after month all the while producing a near zero interest rate environment in which it is impossible to obtain a decent rate of return on investment capital for most people. This tsunami of hot money crashing ashore and then receding back only to crash ashore again and recede back out again, repeat ad nauseaum, ad infinitum, is what has given rise to the insanity that we now daily witness in the paper markets.

Rather than having a calming or stabilizing influence on the markets, the “masterminds” behind it have re-defined the world volatility. This wall of money is so fickle, so unwed to any deep-seated conviction, that it is a beast, a truly out-of-control behemoth that can easily devour the entire financial global system.

Thank you Mr. Central Banker. Job well done. Keep telling yourselves how successfully your policies are working.