The stock market crashed 10% in January and as an investor and bitcoin enthusiast I have been unlucky enough follow this closely. It's not looking to rosy for stock and bond traders, When you listen to mainstream media you just get a blur of intensity and confusion. If you've seen The Big Short, you can probably imagine why. It's worth while to summarise the situation and how the world got here. It may be a major set up for crypto currencies.
Media are blaming the crash on China, but this is not entirely fair. China's stock market has climbed rapidly in previous years and having such high valuations, more than twice the PE levels of the US, it was always more volatile. Also its markets open earlier in the day than those of the US making it easy to blame.
After the dive in global stocks in August the Chinese government bought in a range of policies to control its stock market. These included banning large investors from selling stocks immediately and phasing in circuit breakers, which close the stock market if it moves to much at once.
In January China was due to have their stock sales ban removed but its market crashed the day before. Their market hit circuit breakers two days in a row. The world market also dropped sharply, pretty much in unison. In response the Chinese government decided to continued the ban on selling stocks until further notice.
Capital controls have become a major attribute of the Chinese economy. Wealthy Chinese citizens are continually trying to find ways to get their money out of the country, often investing in property or family businesses overseas. There is an annual limit of around $50k per person.
The Chinese government have built up huge foreign exchange reserves over the last 20 years in efforts to keep the Yuan at a low price. These overseas investments often go into government bonds built sometime into high rates corporate bonds. This three trillion investment had held up the value of these investments in the US.
The tendency for people to want to get money out of the country is often caused by a depreciating Chinese Yuan. In response to this now the Chinese government are reclaiming their own foreign investments which helps boost the Yuan value and maintain stability against its basket of currencies. With the US dollar rising so much out of sync with this basket it has become increasingly difficult for the Chinese cover this pair.
On December 16 the US Fed raised interest rates, In the days before the rate rise Wall Street high yield bond funds started getting into trouble. this was in part due to the low oil prices which they are exposed to through their investments. After an initial positive pop, the US market continued down within the week. Boosting the USD against world currencies the global divergence of interest rate policy further exacerbated the apparent Yuan/USD devaluing.
In line with Ben Rickerts legacy from The Big Short I have been inspired to research the bond market, in particular High Yield bonds. It has proven difficult but I have found that corporate bonds are highly interdependent with the bond market in general. High Yield bonds make up at least 5 and up to 30 percent of A grade mutual fund portfolios. Bonds are also giving very low returns. At the moment, one year returns are often negative. These returns have been somewhat offset by a strong US dollar, but this is not likely to last much longer.
The situation leaves us with the following factors
Media are blaming the crash on China, but this is not entirely fair. China's stock market has climbed rapidly in previous years and having such high valuations, more than twice the PE levels of the US, it was always more volatile. Also its markets open earlier in the day than those of the US making it easy to blame.
After the dive in global stocks in August the Chinese government bought in a range of policies to control its stock market. These included banning large investors from selling stocks immediately and phasing in circuit breakers, which close the stock market if it moves to much at once.
In January China was due to have their stock sales ban removed but its market crashed the day before. Their market hit circuit breakers two days in a row. The world market also dropped sharply, pretty much in unison. In response the Chinese government decided to continued the ban on selling stocks until further notice.
Capital controls have become a major attribute of the Chinese economy. Wealthy Chinese citizens are continually trying to find ways to get their money out of the country, often investing in property or family businesses overseas. There is an annual limit of around $50k per person.
The Chinese government have built up huge foreign exchange reserves over the last 20 years in efforts to keep the Yuan at a low price. These overseas investments often go into government bonds built sometime into high rates corporate bonds. This three trillion investment had held up the value of these investments in the US.
The tendency for people to want to get money out of the country is often caused by a depreciating Chinese Yuan. In response to this now the Chinese government are reclaiming their own foreign investments which helps boost the Yuan value and maintain stability against its basket of currencies. With the US dollar rising so much out of sync with this basket it has become increasingly difficult for the Chinese cover this pair.
On December 16 the US Fed raised interest rates, In the days before the rate rise Wall Street high yield bond funds started getting into trouble. this was in part due to the low oil prices which they are exposed to through their investments. After an initial positive pop, the US market continued down within the week. Boosting the USD against world currencies the global divergence of interest rate policy further exacerbated the apparent Yuan/USD devaluing.
In line with Ben Rickerts legacy from The Big Short I have been inspired to research the bond market, in particular High Yield bonds. It has proven difficult but I have found that corporate bonds are highly interdependent with the bond market in general. High Yield bonds make up at least 5 and up to 30 percent of A grade mutual fund portfolios. Bonds are also giving very low returns. At the moment, one year returns are often negative. These returns have been somewhat offset by a strong US dollar, but this is not likely to last much longer.
The situation leaves us with the following factors
- The Chinese stock market cant go up in the shorty term because why would you buy when you may not be allowed to sell?
- The current pattern will continue at least until we no longer have divergent interest rates and the USD has dropped in line with world currencies. Chinese stabilisation policies will have a negative effect on the US bond markets as they will remove funds from this area
- The problem is exaggerated by low oil prices which are disproportionately bad for the US. If the USD was to go down this would also put pressure on the US bond markets.
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