Here's why investors run to the US when markets quake

February 01, 2016 15:30
Capital is again flowing to the US in search of a safe haven amid turmoil in the global financial market. Photo:

It's only one month into the new year but it's already beginning to look like a bumpy one, judging by recent world events.

Hongkongers can congratulate themselves for not being embroiled in the tumult -- after all, it's happening in a distant part of the world -- but they may not be immune to the financial upheaval. 

Since the beginning of the year, the stock and futures markets have posted sharp tumbles, saddling investors with hefty paper losses.

A strengthening US dollar and tepid demand are putting downward pressure on commodity prices.

Sagging trade and falling freight rates are dragging on economic growth.

Shipping a 40-foot standard container from Rotterdam to Shanghai now costs just US$300, just enough to cover fuel, processing costs and canal tolls.

Former Federal Reserve chairman Ben Bernanke, dubbed “Helicopter Ben” for suggesting that that he would drop money from a helicopter to fight deflation, set the money-printing machines in motion during the 2008 financial crisis.

Lenders, state firms and private enterprises in emerging economies, lured by the cheap dollar, went on a borrowing spree.

The frenzy officially ended in December with the first interest rate hike in nearly eight years thanks to new Fed chief Janet Yellen.

The US dollar can only become stronger as a safe haven in this time of turmoil.

Meanwhile, debt-laden economies and companies face more pain.

Interestingly, the 2008 financial tsunami did not evolve into a worldwide crisis because China and other emerging economies cushioned its impact.

Today we can no longer rely on them -- they're also mired in debt and are hobbled by overcapacity.

George Soros has warned of a hard landing for the fatigued Chinese economy after his aggressive shorting of Asian currencies.

But as some commentators have noted, shrewd predators like Soros would not give away their next move.

So when Soros lets us in on his transactions, it’s a sign he could be planning to close his positions and cash out.

Soros’ dim view of China’s prospects is at odds with Beijing's official statistics.

For instance, he put the country’s actual GDP growth rate at just 3.5 percent when the official figure is nearly twice that.

Manipulating the economy to shore up growth, especially in a low interest rate environment, ultimately wastes resources.

Beijing will have to face the consequences.

Also, Soros warned that capital outflow from private firms or from the central bank through its purchases of renminbi might drain China’s foreign exchange reserves.

And policy blunders could undermine people’s trust in the government.

The consensus is that Beijing is running out of options, which is why it has devalued the renminbi to stimulate exports.

But the move created so much weakness in the redback that the government spent US$100.8 billion to buy its own currency in December alone.

The German financier Nathan Mayer Rothschild had this trading philosophy: “Buy on the cannons and sell on the trumpets”.

Upheavals bring opportunities. There will always be a winner who takes all the spoils. Losers are forced into a reboot.

But that principle no longer applies. These days, when investors panic, they run to the US -- money and all -- for cover.

This appeared as separate articles in the Hong Kong Economic Journal on Jan.27 and 28.

Translation by Frank Chen

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A famous Hong Kong writer; founder of the Hong Kong Economic Journal