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Unthinkable Risks Are Becoming Routine and the New Normal

Unthinkable Risks Are Becoming Routine and the New Normal

Friday, 27 November 2015 12:23 PM Current | Bio | Archive

As this short week, at least as far as the U.S. financial markets are concerned, comes to an end, there are a few things, among many of course, that could be of interest to investors.

Today it took many by surprise seeing the Chinese stock markets getting a rather rough day after Reuters reported China Haitong Securities, which is China’s fourth largest brokerage by market capitalization, being put under investigation by the stock watchdog.

Investors who might be interested in the Chinese stock markets, maybe could do better remaining on the side lines, as it is very unlikely we’ve seen the latest in the ongoing cleanup in the illegal margin trading practices over there.

Anyway, the Shanghai composite tanked 5.5 percent on the day, which was its worst performance since August 25.

The ongoing cleanup becomes even more interesting when we take into account what the Financial Times (FT) wrote yesterday wherein it says China’s “national team” owns at present at least 6 percent of the mainland stock market as a result of the state-sponsored rescue effort earlier this year, “… the two state financial institutions that led the bailout increased their ownership of the Shanghai and Shenzhen exchanges from 4.6 percent of total tradable A-share market capitalization at the end of June to 5.6 percent three months later…”

Goldman Sachs estimated in September the government had spent 1.5 trillion renminbi, or about $234 billion, to support the market in July and August, a figure that included then the brokerage purchases.

So far, the least we can say is the whole situation is far from transparent and certainly confusing for not saying misleading, especially after in late August the securities regulator itself stated that China Securities Finance Corp., which is a member of what the FT calls ‘China’s national Team’ and which is the main conduit for injecting government funds into the stock markets, would halt large-scale purchases but maintain their existing holdings indefinitely, which apparently has not been the case.

In simple words, one could say there is at present no good reason for entering these markets and not getting blinded by all the fuss that’s going on around China’s currency becoming part of the IMF’s Special Drawing Rights (SDR) basket alongside the dollar, the euro, the British pound and the Japanese yen. 

That said, the coming weeks will certainly be interesting ones as we have the ECB that will decide next week to what extend and/or how it will ease its monetary policy further, and then, two weeks thereafter the FOMC, probably, starting its long way to normalization of its monetary policy and whereby the Federal Reserve will face the daunting challenge of “extrication” from an abnormal long era (since December 16, 2008) of monetary policy at near zero interest rates (ZIRP)

It is an undeniable fact at present a lot of questions are and have been raised whether the monetary policies, applied by the most important central banks in the world, if these policies have now come to the point where they are “broaching” the limits of their (expected) efficacy while they already have already started ceding some attention back to “fiscal policy.”

In this context, the Bank for International Settlements, which stands for the central bankers’ central bank, wrote in June in its annual report:

“Globally, interest rates have been extraordinarily low for an exceptionally long time, in nominal and inflation-adjusted terms, against any benchmark. Such low rates are the most remarkable symptom of a broader malaise in the global economy: the economic expansion is unbalanced, debt burdens and financial risks are still too high, productivity growth too low, and the room for maneuver in macroeconomic policy too limited. The unthinkable risks becoming routine and being perceived as the new normal. This malaise has proved exceedingly difficult to understand…”

Yes, to most of us it’s very difficult to understand, but when we see the ECB is still exploring today as many as 20 options for reviving inflation only a week before its Governing Council’s rate-setting meeting on December 3 and the Bank of England’s Governor Mark Carney saying this week he still doesn't know when British interest rates could start to rise, it should become clear to all of us who accept looking reality in its face this era of “unthinkable” monetary policies has lived its life and maybe it’s high time starting thinking whether non-price mechanisms and the prevalence of macro-prudential controls might have being put in place with all the urgency the subject merits. 

We’ll see if within a couple of weeks the Fed thinks that way.

What’s for sure is interesting times are coming, which doesn’t mean that we will enter an era that will be profitable to many investors.

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What’s for sure is interesting times are coming, which doesn’t mean that we will enter an era that will be profitable to many investors.
investors, stocks, fed, rate
Friday, 27 November 2015 12:23 PM
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