Investment Newsletter – January 2023
Most countries around the world have welcomed China’s move to open up to travellers from all over the globe and encouraged Chinese to travel abroad, after the country’s COVID-19 battle entered a new stage. However, a small number of countries and regions, such as the US and Japan, see China’s reopening as another chance to defame Beijing. Some imposed travel restrictions on arrivals from China, citing what experts called “unnecessary ” and “discriminatory” measures to defend their moves, some media reports discredited China’s COVID policy, but the real intention is to sabotage China’s three years of COVID-19 control efforts and attack the country’s system. The expert explained that it is possible that a surge in infections could lead to the emergence of new variants. However, Chinese equities are firmly back in favor after jitters over a chaotic exit from the COVID Zero policy, as traders seize on signs that the virus outbreak may have peaked in some cities. Investors are also betting that the world’s second-largest economy will receive a boost as the border with Hong Kong reopens.
As of 4 January 2023, former Federal Reserve Chair Alan Greenspan said a US recession is the “most likely outcome” as the central bank tightens monetary policy to curb inflation. While the last two monthly reports showed a deceleration in consumer-price increases, “I don’t think it will warrant a Fed reversal that is substantial enough to avoid at least a mild recession. The risk of lowering rates too quickly is that inflation could flare up again and we would be back at square one and that could damage the Fed’s credibility as the guarantor of stable prices. For that reason alone, I do not expect the Federal Reserve to loosen prematurely unless they deem it absolutely necessary, for example, to prevent financial market malfunctioning,” he said.
The Bank of Japan’s (BoJ) next move could be removing the negative interest rate after its surprise widening of the Japanese government bond (JGB) yield band. The BOJ’s greater emphasis on the need to enhance the JGB market functioning suggests an increased likelihood that it will abandon the negative interest rate policy or terminating YCC altogether. According to Financial Times, history suggests ending yield curve control won’t go smoothly. The Federal Reserve capped yields to finance the US war effort from 1942 to 1951. That YCC lulled businesses into assumptions about interest rates and their volatility that broke down when the caps ended, causing losses for investors holding longer-term bonds and sharp dislocations in mortgage markets. The Reserve Bank of Australia faced similar strains in their pandemic-induced YCC program. They abandoned it in November 2021 in the face of rising inflation and market pressures. Moreover, the Swiss National Bank jettisoned its cap on the Swiss franc in January 2015 without warning, a move that sent shock waves through financial markets, inflicted losses on banks and wiped out some currency traders. That said, a systemic meltdown is inevitable.
According to Daniel Lacalle, a new paradigm in policy will unavoidably emerge as a result of the disastrous economic and monetary effects of years of excessive easing, and neither real earnings nor deposit savings benefit from that. When given the choice between “sound money” and “financial repression,” governments have forced central banks to choose “financial repression.” The only reason central banks buy gold is to protect their balance sheets from their own monetary destruction programs; they have no choice but to do so.
