We are facing a hyperinflationary process global and historical in financial assets. The bet is that all this does not explode and will probably be the case as long as the dollar continues to be in demand as a store of world value. The G10 Central Banks broke the bond market by canceling it as a savings alternative and therefore one can escape the devaluation of the dollar only towards equities, commodities or cryptos.
In this way, a market equilibrium is created in which they force the dollar to escape from the liquidation assuming enormous volatility, the asset class switch is not risk neutral. Since it is hardly in anyone’s interest for the dollar to disappear as a store of value, a « cooperative » Nash equilibrium was generated in where everyone ends up buying everything except bonds.
That the long bonds of almost all the relevant G10 countries are below 2% and that the short part of any G10 rate curve is at 0% or negative levels, speaks of an equilibrium intentionally caused by central banks. Bonds yielding so little offer two problems to the saver:
1) the accrual rate is no longer even enough to offset the global inflationary cost,
After the dissemination of the bill that would be dealt with in extraordinary sessions by Congress, the application of systemic exclusion mechanisms that are contemplated in the initiative can be expected. Which are.
By JOSÉ LUIS & nbspCETERI
2) Faced with an increase in international rates like the one observed since the beginning of 2021, it generates capital losses. All this was caused by the mega issuance of dollars generated by the FED that literally annihilated the bond market. However, the liquefaction of the dollar, the yen, the euro and all currencies of the G10 persists and therefore, hedging against said dynamics forces a change of asset class and enter equity, commodities or cryptocurrencies. One of the problems with this pathology is that it radically changes the volatility profile of the portfolio.
The dilemma is that « this forced rotation » implies the assumption of volatilities that tend to be well above a bond and a lot of investors in particular, the retail investor, leaves them in a very uncomfortable position of portfolio positioning, going through a universe of volatility when who is not used to it. This is one of the major distortions caused by the monetary response to COVID that began in March 2020.
The issuance of dollars was so huge and fast that it generated a distortion in portfolio allocation. Having G10 bonds no longer makes any sense and that demand for financial assets went to feed other assets. The problem is that these new assets tend to be much more volatile.
The US dollar is a stable currency depending on how you look at it. Obviously, against its two traditionally competing currencies, the yen and the euro, it has more or less been piloting it well. However, if one analyzes the evolution of the dollar since the lows of March 2020, he himself has been megadevalued against other groups of assets.
Measured against stocks, since March 2020 when the market has lowered, the dollar has devalued in the following way. First, against Nasdaq (QQQ) 83%. Second, against SPY (S&P) 69%. Third, against Ethereum (crypto) 735%. Fourth, against soy 60%. In this way, the purchasing power of the dollar measured in non-traditional units that exceed the monetary spectrum. it has collapsed during 2020. The same happened in the previous crisis. From the lows of March 2009 to December 2019, the QQQ, for example, generated returns close to 750%, so the dollar devalued against technology by 750%.
In this way, the objective of the FED is very clear: to generate a megadevaluation of the dollar against stocks and in this way cause a « positive wealth effect » on the average wealth of the North American citizen that catapults consumption. This mechanism of “inflating financial assets” to impact the real economy was explicitly described in one of the FED reports during 2010.
At that time Ben Bernanke explicitly told the market that the Fed sought to « fatten » financial assets, among other things, to catapult consumption via a nominal wealth effect. Obviously, the counterpart of all this is the generation of a global bubble that we are seeing today and it does not have to implode. The plan will be to leave all these stimuli in the market and that over the years global growth and inflation liquefy them. Welcome to the new liquidéz trap.