Categories

Investing

Tools

  • Economy & Politics
  • Investing
  • Personal Finance
  • Related Posts


    Cops Exit Ebola Victim Apartment, Dump Gloves, Masks In Sidewalk Trash Can
    25 Banks Said To Fail European Stress Test, 10 In Talks On Capital Shortfall
    Overnight Futures Fail To Ramp As Algos Focus On New York’s First Ever Ebola Case
    Why Gold Is Undervalued
    Everything You Need To Know About Blue Chip Earnings In One (Ugly) Table
    Google Vs The Entire Newspaper Industry: And The Winner Is…
    It’s A Green Back For A Reason!!
    UPS CEO: Firm Is Ready For Peak Season Challenges
    Futures Decline On Weak Amazon Results, Ebola Concern
    P&G To Exit Duracell Battery Business
    Ford’s Lower Profit Beats Estimates; Sales Down On F-150 Launch
    Swiss Officials Search Sarasin Bank In German Tax Probe
    Stress Tests, Ebola Cool Global Stocks After Best Week Of Year
    Pfizer’s $11 Billion Buyback Plan Deflates AstraZeneca Bid Hopes
    73 Swiss Banks Ask U.S. To Revise Proposed Tax Amnesty Deals


    Beware The Great Central Bank Bubble

    I guess it all came to a head for me when I saw the story of the Thai billionaires.

    This pair has dropped about $27 billion in acquisitions this year. In April, one of them pulled together a $6.6 billion deal in a week.

    You can’t refinance a house in that kind of time.

    That’s when I realized this global central bank easing is starting to develop some very dangerous consequences.

    The U.S. Federal Reserve kicked off this money-printing frenzy to re-liquidate the very banks and financial institutions that started the whole mess. It then began to spread because no country wanted to see its banking system collapse.

    The last time that happened was during World War II, when the British handed over the global economy to the United States by pricing every major commodity in dollars. That meant every nation had to hold dollars to be in the global marketplace. The dollar became the world’s reserve currency.

    That was seriously challenged when the 2008 financial fiasco occurred. China, at that point, had managed to avoid the over-leveraging and derivatives shenanigans that the West had found so engaging.

    And its growth rate and internal demand was strong enough that there was a real sense that the country could de-couple from the West’s maelstrom and become the globe’s engine of growth moving forward.

    Close, But No Cigar

    Unfortunately for the Chinese, they missed by a hair.

    The West collapsed, and that had more of an effect on China than the nation anticipated. They started their wacky building programs to keep internal demand going to make up for the loss of outside business.

    But it got a bit out of hand.

    Meanwhile, the West has been pumping money like crazy into the pathetic institutions it felt compelled to save — for the good of all us little people, of course. And the institutions in their gratitude have made billions of dollars quarter after quarter and are still not rolling this money into the economy, where it was supposed to go.

    China’s challenge is the opposite. It’s deployed its money into the economy on massive building and infrastructure programs that have no real market demand yet.

    The Other Shoe

    The thing that really started to make this whole easy money thing scary was when Japan, the third largest single economy in the world, decided it was time to get in on easy money game with the United States and Europe.

    The Japanese have lived in a unique economic realm for almost 30 years. First, the citizens generally hold all their money domestically in Japanese postal accounts that are like retirement/savings accounts. Because interest rates are low to non-existent (as is inflation), there’s no real incentive to spend money. And since nearly all the nation’s debt is held internally, it has very low volatility since no one in interested in trading it.

    Well, trading it in a conventional way. Actually, the yen has become the world’s carry currency trading vehicle.

    Investopedia defines a carry currency trade like this:

    A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.

    Here’s an example of a "yen carry trade": a trader borrows 1,000 Japanese yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let’s assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.

    But now that the yen has been opened up, Japanese are going elsewhere for value and the yen is being traded for the first time in decades in the open markets.

    And the markets — both bond and stock — are going nuts.

    Back To The Thai Tycoons

    So the reason the Thai spending hit me was I realized that these barons of industry can get their hands on this cheap, easy money. I mean who else could borrow $6.6 billion in a week? Most small and medium-sized businesses can’t get loans in the United States — to expand.

    From there, it’s simply doing the math. The easy money is getting outside the financial institutions and into the hands of big, safe (a relative term to be sure) corporate types who are borrowing big at crazy low rates.

    Unfortunately, the blowback here is that rates are already ticking up in the United States. And that trend will follow everywhere else.

    And in that great unwinding, bonds — from Treasuries to junk — will be in for a reckoning that will make the real estate bubble look like a blip.

    Now, this may not come to fruition. But given the short-term myopia of those that drove us into the past financial imbroglios and the fact that we’ve rewarded them instead of punishing them, I’m betting they’ll be at the trough until the end. And anyone not clear of their greed will pay the price.

    — GS Early

    Discuss this Story:

    Comment Policy: We encourage open discussion. Comments including racist statements, profanity, name calling or spam will be removed at our discretion. We use filters for spam protection. If your comment does not appear it is likely because it violates the policy.

    Microsoft Sales Beat Street Hopes, Cloud Profits Up
    Amazon’s Holiday-quarter Forecast Disappoints, Shares Dive
    UPS, FedEx Seek Ways To Manage Massive Peak Season Package Bulge
    Sears To Close Stores, Lay Off About 5,500
    Must-knows About The Takata Air Bag Recalls
    Promising Hepatitis C Drug = 100% Gain
    GM Q3 Earnings Strong On North America, China
    Is The Tupperware Party Over?
    7 Brain Biases That Could Affect Your Investing Strategy — And How To Outsmart Them
    This Is How Caterpillar Just Blew Away Q3 Earnings
    Futures Bounce On Stronger Europe Headline PMIs Despite Markit’s Warning Of “Darker Picture” In “Anaemic” Internals
    Russia Is De-dollarizing
    How The NSA Has Turned Into A Giant Profit Center For Corrupt Insiders
    Caterpillar Profit Beats View, Raises Outlook; Shares Gain
    Comcast Reports Higher Quarterly Revenue, Profit
    GM Posts Higher-than-expected Profit On Strong North American Demand
    Stock Futures Inch Up, Indicating Rebound; Earnings Awaited
    Business Activity Improves In China, Euro Zone But Little Sign Of Turnaround
    Honda Executives To Take Pay Cut After Fifth Fit Hybrid Recall
    U.S. Prosecutors Probe Takata Corp Over Statements
    Euro Zone Business Growth Unexpectedly Gains Pace, Prices Still Falling: PMI
    Tesco Scraps Profit Outlook As Accounting Black Hole Deepens
    Chinese Trainmakers Set To Go Head To Head For California Deal
    U.S. Stock Options Markets Agree To Need For Trading Halts On Big Moves
    Buffett Copycats Risk A Pounding As Berkshire Portfolio Suffers
    Bond Funds Stock Up On Treasuries In Prep For Market Shock
    Stocks Fall As S&P 500 Breaks 4-day Winning Streak
    Apple Appears Upstoppable: Stock Hits High
    Yelp Shares Dive On Sales Forecast
    AT&T Shares Drop As Earnings Miss Estimates
    Read more from Investing...

    Liberty Investor Digest

    Get today's most important
    financial headlines all in
    one place by email!



    Sources


    close[X]

    Sign Up For Liberty Investor Digest™!

    Get Liberty Investor Digest FREE By Email!

    Input your name and email address in the fields below and get today's most important financial headlines sent straight to you inbox!

    Privacy PolicyYou can opt-out at any time. We protect your information like a mother hen. We will not sell or rent your email address to anyone for any reason.