Austerity Is Dead........

Austerity is dead…. New printing of flat money/lower rate? (contributed by Chan Cheh Sing)

On 12th May 2012, the People’s Bank of China lowered the reserve requirement ratio by 50 basis points. It is the third cut in the reserve ratio so far in the current cycle of monetary-policy loosening, with the previous two cuts in November and February.
The ratio, or the level of deposits that banks in China must hold in reserve rather than lend out, will drop to 20% after the latest cut takes effect.

What is worrying the PBoC?

In April 2012, renminbi deposits fell by 465.6 billion yuan.  A year ago, they increased by 342.4 billion. This could only mean deposits were fleeing the Chinese banks, thereby reducing the amounts banks could lend. Also In April 2012, new renminbi-denominated lending fell 8.2% from the same month last year and 32.6%—329.6 billion yuan—from this March.

What will China government do?

·         Cut further. They may even ask the bank to cut lending rate.

·         Re-order huge infrastructure building.

In Europe, previous ruling parties are falling like snow. Those who support austerity are voted out. But, does that mean EU is ready to print money?

The bias is to print, to flood and to spend. But will it work to revive the economy globally??

The answer is to NO. (The problem is in the money transmission system, especially the institution)

Then which asset class will be a buy, which will be a sell?

·         If the fundamental is not going to be good (and go worse if the problem is prolonged), then bond is a buy. The emerging market local bond is a buy (do pay attention to currency swing, if your base currency is USD). Developed market will act as buffer to lessen volatility.

·         Gold will be sold off either EUR survives or EUR cracks. Both cases are a confident vote to flat currency.

o   If EUR survives, then the fear that EU will break up will dissipate, and confidence on paper currency will return.

o   If EUR cracks, then the EU17 members will go back and print their own currency. Then each country will defend their currency. This means they will not let gold be the medium of exchange… gold plunges.

·         Equity will rally… but not take recent high as seen from the QE I & II; there is a margin of diminishing return. 

The end.