Friday 25 April 2014

Understanding fund flows and how the party ends

In this week's State of the Nation's update, we analyze how deflation remains the overwhelming fear of policy makers in the US and Europe and the impact of the major economies’ policy decisions on other countries.

Inflation rates in the US and Europe are currently still below the 2% target rate.

CPI % change (y-o-y) since last year

% Change




Source: Bloomberg

Deflation can cripple the economy and has major policy implications as it limits the ability of central bankers to encourage borrowings by creating negative real interest rates and may hinder their ability to raise future interest rates.

The real value of debt will go up in a deflationary environment, producing financial strains to both households and businesses alike. 

Since 70% of the US economy is driven by consumption; economic growth, employment and policy decisions on interest rates will be largely dictated by when US households begin to spend again.

The ultimate goal of the major economies in US, Europe and Japan is to rebalance the global economy away from where the rich currently borrow massively to buy things from the emerging economies.

However, the emerging economies have learned to protect their long-term interests. 

The developing countries are hoarding by building up dollar reserves, to prepare for subsequent intervention when fund flows ultimately reverses. The effect of this is to keep the currencies of emerging economies weak to spur their exports, making the rebalancing of global economies even more difficult.

Read the full article in The Edge.

Next week, we will analyse the impact on the Malaysia’s bond and stock market.  We will look at the reasons for the high levels of liquidity and what drives it. Why foreigners bought our bonds and equities, and what will make them sell or perhaps buy even more. 

The analysis on Malaysia is with a view that US must preemptively rein in its excess liquidity of some US$3 trillion. With an expected sustainable economic growth months away, its money supply could explode, threatening the next round of asset bubble.


  1. The Bonds bubbles is the next big things? But with Fed ultimatum power of Global Financial market & USD is still the life blood of the financial body systems, the FOMC can do whatever measurements to CREATE & CONTEND the world econmy generally & the financial market specifically. The question is always when the things start to screwed up, only they will fix it and in the process those who are smart enough to follow the trend will be the winners.

  2. I think this is a great article. ...I am a Fed follower n I think so far they done a great jobs since 2008 financial crisis eventhough it is artificial but US is clearly showing the sign of recovery & become stronger...I am pretty sure those who are smart n with huge cash piles enjoy the Fed policy with cross borders carry yield. Right? ;) which including yourself.

  3. Actually Fed has been winding down their Balance Sheet of USD 4 trillions accordingly by following the economy data. However interest rate will still remain low...It is not a good sign if the interest rate is going up with lot of uncertainty around the world and huge debts mounting the global government.