Friday 9 May 2014

What happens when the party ends?

In the third and final installment on global capital flows, we argued that rising interest rates in Malaysia is inevitable and likely to happen soon. This will happen either preemptively, as a policy decision of Bank Negara Malaysia (BNM), to arrest asset bubbles and household debts or being forced into it as a result of capital outflow.

Raising domestic interest rates on our own, sooner rather than later, is clearly the right option.  We believe BNM will decide on this route as well.

US long-term interest rates have risen sharply and short term rates will inevitably rise.  The interest rates differentials between Malaysia and US are already trending downwards even based on short-term US rates.

We explained the consequences of the above on the stock market, the bond market, the property market and the Ringgit.

Read more in The Edge this week.

17 comments:

  1. Base on your prediction that US rates will rise, I predict stock market is going to correct soon.

    ReplyDelete
  2. The organiser (Fed) won't let the party end soon as this time is different, its balance sheet as expand to USD 4 trillions after 2008 financial crisis. Fed have to be very careful as they trimmed down the QE now. Maybe 2008 teach the world one shouldn't over leverage when the party is still on, maybe not. I foresee Fed won't simply stop the music as it will destruct the economy recovery process as Europe still on the way or may print more money soon, as for China, it try to create their own set of financial system which may cause more harm than good if it collide with Fed's game set. Mr. Tong, would great to meet u in person to share my views as I think we need think independent to see the wind of changes, as what happen in the past may not apply in the future especially in financial market. If it is so, all the historians will be very rich. Cheers...

    ReplyDelete
    Replies
    1. Care to share what kind of financial system is China trying to implement?

      Delete
  3. One of it is the 'shadow banking' which is allowed and widespread in China....

    ReplyDelete
  4. Einhorn met Bernanke and Bernanke told him that he was 100 percent sure that there’s not going to be hyper inflation. I got this news from Bloomberg. So, if this is true, then Fed won't increase the interest rate for the near future.

    ReplyDelete
  5. It is all depend on the economy, if the unemployment drop tp 3-4% and the GDP grow more than 5%, it is unlikely to interest rate hike. If Fed don't push the 'stop music' button, it will lead to the biggest asset bubble due to cheap money which exactly happened from 9/11 to 2008 financial crisis. By the time it is too late, only smart hedge fund will make big bucks and rest will suffer. Again, 1% always have the advantage regardless how the market go....I personally don't like it in the form of ethical but we are in for making money.

    ReplyDelete
    Replies
    1. i mean it is unlikely no interest rate hike...

      Delete
    2. I mean not for now. Maybe in the future. Because Bernanke said that Japan has even bigger QE and they have not experience any hyper inflation yet.

      Delete
    3. Maybe there is one more reason that the Fed is not raising the interest rate is because China is slowing down.

      Delete
    4. Fed's main job function basically is to ensure the financial stability in USA, I don't think they give a damn on China and Japan unless USA's interest in stakes. However, even Fed have the so-called ultimate power to decide how the financial market spin around, in FREE Market, every participants is crucial to ensure things go well and sustainability of economy growth. However, other participants are homo sapiens which full of greed that make the market upside down.

      Delete
    5. Fed's normally will act only AFTER the ramifications of certain events...most of the time, they are the creators of the events too...eg. after 9/11, they lower the interest rate too drastically thanks to Alan Greenspan...

      Delete
  6. If China is slowing down, then it would affect American jobs, wouldn't it?

    ReplyDelete
  7. I have been hearing China slow down many-many years back. Even some hedge fund bet on it, I think they screw up now. With the size of population of 1.3 billions and huge Geographical areas. The economy activity cycle will never end. The so-called slowed down is due to over supply & "the wicked entrepreneur culture" in China. I personally think China need to follow the Global economy & financial system which allow their economy especially in financial sector open & compete with G8 country. The Shanghai Free Trade Zone unlikely success if the movement of capital is restricted. The worse is u can't even use Facebook in China. All these issues still remain a challenge for the leaders. US & China will never be best friends like its relationship between US & Japan. If China really slowdown, it is affecting Asians countries which initially will spread to global nations. Technically, US & whole world are eyeing China market due to their population but it is not easy to deal with China Chinese. They only think of short term profit & ignore many ethical issues. Another issues China facing is the income gap which I think the gov need to take it seriously. As for attract foreigners to invest in China, I think they need to have genuine legal system & sincerely implement it. I don't see China can become a develop nation in term of "human culture" there; I agree what Lee Kuan Yew say "China think they can attract talents from 1.3 billion people but they forget US can attract talents from 7 billions people" I personally travel a lot, I never think of China as my vacation destination. I don't think American jobs depend on China too; in fact the USA is learning from the mistake in capitalism & start moving factories back. China is important but US initially is still controlling the world financial system which has been there thousand years. U can change it over night.

    ReplyDelete
    Replies
    1. Totally agree with you. China can never liberate their currency unless there is a political change. How can they liberate their currency when the communist party are not willing to share power. That means, without democracy, China will never fully liberate their currency.

      And without the liberation of currency, China will never have a strong financial or economic force to compete with USA. USA can continue to print as much as they can, and the hot money will continue to flow to China and Asia causing inflation.

      Delete
  8. The easiest way to force China to play fair is for USA, Europe and Japan to continue to print more money causing more hot money flowing into China. China has no choice but to reform their finance and hence their political reform will have to be taken seriously.

    ReplyDelete
  9. Mr. Tong, what happen if Fed power is "collide" with market force? If BNM try to act his own way & raise the interest rate, yes it may contain capital outflow for a wiggle but this will stall the whole economy as household debt as it highest, no real income raise & the property market will perhaps CRASH!

    ReplyDelete
    Replies
    1. I mean outflow for a while.... Of course bond market will experience sell off too... All this sound not good, eventually it will tank the ringgit if this country don't have real growth, this will happen very fast..... Again, peg currency as solutions? I think Malaysia will be worse than North Korea by then... All the best to the property buyers & think twice before launching project, of course the faster u can sell, the risk u can transfer to the buyer & the banks. When buyers can't serve the loan, banks screw up, whole system will collapse....

      Delete