Chan Kung's Thoughts on the Current Global Stock Market
On March 3, 2020, for the first time ever in history, the 10-year U.S. Treasury yield has dipped below 1% within the global stock market. This was due to the premature cut in the interest rates by the Federal Reserve, which sent many investors fleeing for other safe-haven assets instead. According to the data by Tradeweb, the recent transactions shows that the 10-year U.S. Treasury yield was standing at 0.993%, compared to its previous holding of 1.085% on Monday. Since then, the fall in treasury yield continued to persist, with the 10-year U.S. Treasury yield falling below the 0.7% key Psychological Threshold, hitting a record low of 0.6900%. Just a few days back, the yield had fallen by another 21 bps, causing more investors to seek-haven Treasuries.
Generally, if bank interest rates rise above the average yield of government bonds, investors are more inclined to abandon the idea of transferring government bonds to their bank deposits, this leads to further government bonds being sold, its price falling and bond yields rising further. On the contrary, if bank interest rates drop, investors are more likely to purchase government bonds, therein raising its price and causing bond yields to drop. As it stands, this is currently the case for the global stock market. People are now turning towards to U.S. government bonds as a haven and are actively considering Chinese bonds too.
If the return on the asset is much lower than the risk-free rate, then stocks, futures contracts, commodities and property prices would all have to be subjected to a reevaluation. Most financial institutions would probably go with the option of selling shares and properties, all of which would cause the prices of assets to fall, and everyone would be bound to buy more bounds while assets are being sold, which results in the Dow Jones Index continuing to fall. At the end of the day, this is all inevitable. Can such logic be proven? The answer is yes. On March 2, the Dow Jones Stock Average fluctuated massively and plunged approximately 1000 points during Friday's transaction and rose to 640 points in the eleventh hour. Meanwhile, NASDAQ's comprehensive index fell by 3.5%, before experiencing a slight bump once again. The U.S. market stated this was a result of the growing concerns and doubts among the investors towards the economy caused by the novel coronavirus pandemic (though we can now confirm that was not the actual reason behind it). As a whole, the decline in the U.S. Treasury yield on March 2 has caused the U.S. market to experience an overall slump in its performance, with the Dow Jones Index falling 12.4% over the week, plummeting beyond the 3500 pointer, the worst since 2009. To make matters worse, the situation continued to take a turn for the worse, causing the stock index to fluctuate volatilely in the market for the whole of the week and declining significantly. In the latest transactions that took place last weekend, the U.S. large tech stocks have all experienced a fall across the board, Apple stocks fell by 1.36%, Amazon's by 1.19%, Netflix by 1.02%, Google by 1.45%, Facebook by 2.2.4% and Microsoft by 2.83%. In fact, America's financial stocks have also plunged with JPMorgan falling by 5.13%, Goldman Sachs at 3%, Citi at 3.45%, Morgan Stanley at 1.83, Bank of America at 4%, Wells Fargo at 4.63% and finally Buffet's Berkshire Hathaway at 1.25%. In addition to all that, oil prices worldwide are experiencing a great tumble, causing U.S. energy stocks to experience a significant decline across the board, namely Exxon Mobil which has fallen by 4.81%, Chevron at 1.95%, ConocoPhillips at 4.93%, Schlumberger at 7.63%, and finally, EOG Energy at 10.64%.
Given such state that the financial market is, the trading of asset will remain bleak as it already is, though not all of it is a loss. In fact, there is huge advantage to be gained from the ensuing downfall, and that is the fact that it contributes to the expansion of the U.S.' fiscal policy, especially since the American president wishes to develop the country's economy and carry out large projects, he no longer has to fear about running out of funds. Ironically, Trump was even at odds against the Federal Reserve previously, and both parties had even stated intentions of maintaining political independence apart from one another. Now however, the Federal Reserve can finally play by Trump's tantrums and cut rates, distribute money, perhaps more money, make it big and play up the theme of economy during the election.
That question that stands now is, how will the financial market affect productions, businesses and the society? That, is what the public is largely concerned about.
For starters, we need to accept the fact that no industries can possibly profit at this given point in time, not with lower interest rates, not with lower asset prices and certainly not with lower bank profits. With all that is happening now, banks would never possibly provide bank loans ever, because there's a high chance they could never retrieve the money loaned once it goes out. As such, save for those who have the power to distribute government finances, it is a common sight to see most businesses and industries struggling for the time being. Plus, it is a little too late to think about businesses now, especially when we are talking about developing the economy and the keyword "market" comes to mind. In a period of high costs, funds will inevitably run low and businesses will be "milked" dry quickly, leaving them with no money. Unfortunately, the best course of action now is still very much to play the game of traditional finances.
Next, with financial difficulties now being an issue, businesses will have to resort to fast-moving consumerism in order to generate quick turnarounds; Meanwhile, fast-moving consumer goods (FMCG), will have to rely on quick turnovers and repeated circulation of cash flow to generate quicker cash flow. With that said, Wuhan's act of sealing itself off from the rest of the world is akin to making a dangerous move in a chess game. Theoretically speaking, even as nothing is happening now, businesses must still increase their turnovers and fight for cash flows in order to survive, and that just isn't possible when the world has cities locking themselves down, as it will cause the economy to collapse and render economy resets challenging. At the very least, we can thank god for the "few flames that have been put out", of course referring to Hubei and Wuhan, the Yangtze River Delta and Pearl River Delta respectively that are still going strong and are able to fulfill the "Three Guarantees" – that is to protect the livelihood of the people, their wages and the operations.
Thirdly, there's the issue of low interest rates that poses a serious threat to global politics. Be it banks or businesses, all business bodies are struggling to make a living, prices are falling at the moment and everyone's being extremely conservative with their money currently. People are looking out for themselves and only for themselves, and that is really just because they all require money to survive. No one would possibly embrace the idea of socialism now, neither would they be receptive towards the guardians of their "employment welfare" and above all, businesses would never find the money needed to splurge and welfare-related expenditures. In conclusion, a time of low interest rates also equates to a time of conflict between conservatism, socialism and welfarism, all which are driven by money.
Fourth, a time of low interest rates also poses a detrimental effect to science and technology. Venture capitals typically favor short and quick projects, and these tend to be system-integrated projects. In short, projects that require a shorter completion time are typically favored and highly supported. Unfortunately, no one has time for a project with a unique theoretical innovation that takes a long time to be developed. We don't live in an era of Newtons, Curies or Turings, but Musks, who happens to be the only innovator who's well-received now.
Fifth, the central banks are not as important as they made themselves out to be. The central banks were key players in the stock market during the early and mid of the 20th century, but they have since fallen behind. In a time of low interest rates, the central banks fail to pull through. First it was the Bank of Japan, then the Federal Reserve and now the Bank of England. Central bank governors must pay close attention to fellow politicians' orders and operate as well as execute in a language acceptable to the financial community. Obviously, when interest rates remain relatively stable, the people would not have an urgent need for a central bank governor.
Sixth, we must understand the inevitability of certain things in a time of low interest rates. It is inevitable that Trump becomes the President, and his conservative beliefs are linked to a time of low interest rates. Sanders started out strong in the American election, but similarly, I believe his rise and defeat is already set in stone, and that all falls to the test of times. He rose because his idea of socialism includes the welfare of labor and middle class, meanwhile, his defeat is also certain as he is not well-liked by the conservatives, after all, businesses need to make a living. Socialist welfare too, requires money. Sanders' rise and fall are not determined by his own actions, but rather, the each and every single happenings of the low interest rate era, which has long been fated.
Seventh, the worsening of geopolitical conflicts. The U.S.-China trade war is practically old news by now and there are many trade wars that exist out there apart from this one. Regardless of whether they're new or old, big or small, they are all guaranteed to affect the stock market. Because low interest rates lead to prices falling, which means everyone will be looking to earn some quick profit from the external market. Even if it isn't a very huge or promising profit, they'd still fight over it, which ultimately leads to geopolitical conflicts.
Eighth, the labor union that is close to crumbling. In a time where low interest rates and overproduction exist, all forms of labor are excessive and redundant, what more with labor unions? Industrial forces that are being represented by a group are gradually being overshadowed and overtaken by freelancers who are not represented by any forces. People care more about income and growth these days, not being represented by someone with a considerable status. Therefore, the left-wing party has split, with the younger generation coming together to form a party based on political idealism that is slowly gaining traction as the day goes by. Meanwhile, the older left-wings are waiting and hoping for the older generations of labor unions to dwindle away and lost their foundation as well as purpose of existence.
Nineth, the world of U.S. dollar is being shaken up. If interest rates and prices fall, how can the foundation of the U.S. dollar remain solid? Then again, the U.S dollar is a strong geopolitical currency that is largely kept afloat by strong powers and there's no immediate currency that can replace it either way. That being said, if the dollar world shows signs of instability and fluctuation, it is certain that this would be fearful.
Tenth, the world is dominated by politics, not economy. Those who engage in economics will not have much future, it is now time for those who involve in politics to show their skills instead. Even if more economy-related problems were to sprout tomorrow, politicians are still going to be the ones to have a final say over the matter, and fellow economists as well as the rich will face a hard time from hereon. The high-flying political era is now back after being set off by the internet storm.
There are lot of matters in the world out there that happen to be inter-related. While these relations may seem confusing to many, they are extremely fundamental relations that cannot be lost, as they are all part of a puzzle that makes it whole and complete. Those who know this full well can easily get a head start on things and prevent a modicum of troubles and risks from happening to them. Those who do not however, can only go along with the progression of the events. Can we expect changes in the near future to come? Certainly, though it will not happen overnight.
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