The Correction comes as Predicted - The start of a Doom Decade?
As predicted in Febuary, the market correction materialized after the Chinese New Year. However, what is not expected is the speed and magnitude of the fall. The Singapore stock market fell 9.9% in a period of 5 days: The second fastest 1 week fall since 9/11. This time round, they are blaming the overinflated China stock market, US Subprime Mortgage and Yen Carry Trades. Now, there are 2 questions for us to ask. Are we going into a Recession and when is all these bloodletting going to be over?
The Curse of Yen Carry Trades!
Before we continue, we have to understand what are Yen Carry Trades. Basically, Japan has the world's lowest interest rates at 0.25%pa. Fund Managers and Corporates borrow from Japan and invested the funds out of Japan. Since the money is more or less free, many fund managers have borrowed heavily in Yen to enhance their investment returns. If interest rates goes up from 0.25% to 0.5%, the cost of borrowing would have gone up 100%. This is like your home mortgage interest increasing from 4% to 8%. When the cost of borrowing goes up too quickly, borrowers would like to pay back their loan to lower their cost. To do so, they have to sell off their equity investments.
Are We going Down, Down & Down?
What has changed since last May? Not much. If you recall what happened last year, the Bank of Japan (BOJ) increased their interest rates from 0% to 0.25% and oil prices pushed above $70. The world was spooked by the unwinding of Yen Carry Trades and the market fell 15%.
This year, BOJ raised their interest rates from 0.25% to 0.5% and the market fell by 10%. Again, the blame is laid on Yen Carry Trades. A 0.5% interest compared to US interest rates of 5%, the profit of borrowing in yen and putting it in US bonds is still attractive. With US dollar falling against Yen, the profit of Yen Carry Trades becomes even more lucrative.
Fundamentally, nothing has changed. Some of the biggest financial institutions in the world are announcing recording profits. The problem with the media, is that they focused on what people are interested in. So when the correction is in high gear, all the positive news are drowned out by voices of negativities and bad news.
The Strategy in of Bottom Fishing
The best time to buy, is when it is cheap. The problem is, how do we identitfy the bottom of the market. There are some clues. The first clue is that the fluctuations of the market will fall to small vibrations, neither going up nor down, just going sideways. At this moment in time, the market has still the potential to go down. There will be many traps to lure investors into the market tricking them into thinking that the market has bottom out. The other way to do it, is to invest in tranches. This way, you can't go wrong.
I do believe that the correction is healthy for the market. The market should end at historical high by the end of the year. The recession probably will not strike this year.
As predicted in Febuary, the market correction materialized after the Chinese New Year. However, what is not expected is the speed and magnitude of the fall. The Singapore stock market fell 9.9% in a period of 5 days: The second fastest 1 week fall since 9/11. This time round, they are blaming the overinflated China stock market, US Subprime Mortgage and Yen Carry Trades. Now, there are 2 questions for us to ask. Are we going into a Recession and when is all these bloodletting going to be over?
The Curse of Yen Carry Trades!
Before we continue, we have to understand what are Yen Carry Trades. Basically, Japan has the world's lowest interest rates at 0.25%pa. Fund Managers and Corporates borrow from Japan and invested the funds out of Japan. Since the money is more or less free, many fund managers have borrowed heavily in Yen to enhance their investment returns. If interest rates goes up from 0.25% to 0.5%, the cost of borrowing would have gone up 100%. This is like your home mortgage interest increasing from 4% to 8%. When the cost of borrowing goes up too quickly, borrowers would like to pay back their loan to lower their cost. To do so, they have to sell off their equity investments.
Are We going Down, Down & Down?
What has changed since last May? Not much. If you recall what happened last year, the Bank of Japan (BOJ) increased their interest rates from 0% to 0.25% and oil prices pushed above $70. The world was spooked by the unwinding of Yen Carry Trades and the market fell 15%.
This year, BOJ raised their interest rates from 0.25% to 0.5% and the market fell by 10%. Again, the blame is laid on Yen Carry Trades. A 0.5% interest compared to US interest rates of 5%, the profit of borrowing in yen and putting it in US bonds is still attractive. With US dollar falling against Yen, the profit of Yen Carry Trades becomes even more lucrative.
Fundamentally, nothing has changed. Some of the biggest financial institutions in the world are announcing recording profits. The problem with the media, is that they focused on what people are interested in. So when the correction is in high gear, all the positive news are drowned out by voices of negativities and bad news.
The Strategy in of Bottom Fishing
The best time to buy, is when it is cheap. The problem is, how do we identitfy the bottom of the market. There are some clues. The first clue is that the fluctuations of the market will fall to small vibrations, neither going up nor down, just going sideways. At this moment in time, the market has still the potential to go down. There will be many traps to lure investors into the market tricking them into thinking that the market has bottom out. The other way to do it, is to invest in tranches. This way, you can't go wrong.
I do believe that the correction is healthy for the market. The market should end at historical high by the end of the year. The recession probably will not strike this year.
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