Capital market are dominated by two assets: stocks deemed to be more risky and so called safe bonds. When economy grows, capital flows into stock markets and increase their prices. When economy is going down capital flight is towards government bonds. Generally last century these two assets were negatively correlated with each other. When stocks rose, bonds were cheaper and vice versa.
One specific type of a bond moving defying norm described above are CCC-rated corporate bonds – junk bonds. Rating (level of issuers’ credibility) is given by three biggest companies: Moodys, S&P and Fitch. Lowest rating bonds – CCC – are considered highly volatile and prone to speculation. Investors must understand that there is high risk of insolvency of issuer. Throughout 1970-2012 factor of insolvency of 10-year junk bonds was 12,5%. Risk is significant but this is rewarded by higher premiums.
In the recent months a lot of interesting things happened in China. Everyone heard about economic slowdown of the Red Dragon, burst bubble in a stock market and mushrooming debt after state interventions. What we haven’t heard a lot about is great deal of success and development Xi Jinping’s government accomplished.
Spreading CNY in Europe
China issues first bonds in yuan (RMB) in London. They aim to get 5 billion RMB. Their yield is at 3,1% which means they are a lot higher in this regard than any European country. After a decade of policy of depreciation, USD reserves started to shrink. Making yuan used more often will balance this outflow of capital.
Investments in stocks are always bear some risk. Risk of losing part of your capital. This risk exists especially when we talk derivatives with leverage. Nowadays day-trading became popular. People with nearly no investment experience, lured by well-made internet adverts jeopardise their savings using futures contracts. Humans are emotional creatures and with enough bravado, greed and ambition to succeed easily turn into addiction.
High tolerance for risk (low risk aversion) stems from lack of knowledge rather than from balanced, informed and analysed decision making process. Sooner or later this will lead to bad results and losses. Greed coupled ith lack of patience makes people pick bad times to gamble. Although the worst is lack of knowledge. Those starting their journey with forex have literally no experience to be able to see and predict rapid price jumps. Best example is CHF which climbed over 40% one day in January only to stabilize and plateau with 15% premium over previous days.
Recently new referendum vote is being prepared. Over 100 000 signatures were collected to put the question about creation of money in the spotlight. To be precise, referendum will ask whether the ability to increase monetary supply should be exclusive to Swiss central bank (SNB). Right now both the central bank and commercial banks are doing it. The problem mentioned is of utmost importance and the referendum results can affect the whole world as we know it.
Creation of cashless money.
First, let’s recap how commercial banks are creating money. Fraction Reserve System is the key! FRS tells how big percentage of the deposit must be hold as a reserve. In Poland it is 3.5%. The rest can be used for loans for clients. From the deposited 100 EUR bank can use 96.5 EUR for another’s client credit. Meanwhile, whole deposit of the 100 EUR is still being accessible for the first client who originally deposited it. Interest rates and provisions from artificially created 96.5 EUR are taken by the bank of course. This is reiterated many, many times.
Policy of near-to-zero or zero interest rates has one purpose – stimulate the economy. The non-existent incentive to accrue savings and a cheap credit consequentially push society to ‘buy’ which in turn should start-up the economy. The case against this way of thinking has strong arguments and many examples.
The game-changer here is that the policy of a free-credit always leads to speculative bubbles and a waste of capital on unparalleled scale. Example? The Oil and Gas sector in the United States and Canada.
I was writing about the New Silk Road some time ago but since then a lot has changed and whole project is much more advanced. For recap I will go over geopolitical setting.
China wants to win the battle for the world dominance and it will be an economy warfare. Their adversary – the United States – dominates over oceans and through which all trade routes are crossing. Without access to global markets Chinese economy will collapse quickly due to amounted debt and gigantic production powerhouse built through exporting.
To do this Xi Jinping resurrected old idea in new clothes. The New Silk Road and special economic zones. It is no longer just a railroad and motorway connecting China to biggest mekkas of world trade. Pipelines, energy networks and tourist centres. Goal? Make the shift from maritime trade to over-the-land giving China advantage over Americans.
I prepared for you 3rd episode of "Hidden Secrets of Money". This one revolves around scale of dollar printing in relation to American gold reserves. Presented process of turning away from dollar in international trade. This eventually will result in the USD losing its reserve currency status and international monetary system transformation.
Knowing the educational value of this series please do not forget that Maloney is making money out of precious metals trade. Think for yourself and research!
Last week headlines informed us about China selling significant share of their American bonds. You can understand that as another episode of financial war between them. I think it is just a piece of a puzzle which will have dramatic impact on global markets and eventually will affect FED’s decision on whether to raise interest rates.
Since financial crisis broke out in 2008 central banks all over the world increased supply of money. Oversupply of free capital should officially stimulate the economy. In practice it was all about artificial demand for government debt. Printing machines started in the US but were quickly followed by Bank of England, Bank of Japan, People’s Bank of China and recently – European Central Bank.
It took seven years to increase supply of currency from 6 to 14 trillion USD.
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