Can The Global Debt Cause Another Financial Crisis?

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Global debt has reached new heights according to recent news reports. S&P is out with a new study arguing that the amount of global debt has increased by over 50% since the Great Recession. This number has created understandable worry among a large number of economically-minded individuals who are concerned about the global economy’s ability to handle massive quantities of debt. But there is also concern about what countries do with the debt that they accumulate. Using debt properly, as well as keeping it low, needs to be the main priority of developed nations around the world.

Debt and financial crises

The relationship between debt and financial crises is not direct. It is true that debt at certain levels cannot be sustained. Large interest payments lead to a considerable amount of stress on a country’s economy. Countries do not have the money that they need to pay for infrastructure or social programs. If countries are placed in a difficult position, they may not have the extra cash needed to pay creditors regularly.

There is the looming chance of a default like the one that harmed Greece during the Great Recession. It is possible that countries will have their credit rating downgraded as well. Countries with lower credit ratings will be unable to borrow as cheaply as before and their budgets will take a hit as a result.

Major Defaults

Major defaults could certainly cause a worldwide financial crisis. But at the same time, some countries can use small amounts of debt to do an extraordinary amount of good. Debt needs to increase in times of economic depression and hardship. Government debt can then be used to put people back to work and provide a general amount of economic stimulus.

Then, governments need to work hard to pay off at least a portion of that debt in times of economic prosperity. It is clear that much of the world is reaching that period now. International leaders need to be devising taxation and spending plans that can start to reduce the world’s debts and deficits before another recession occurs and they need to rise again.

What needs to happen

Countries have to gain control of their deficits during periods of sustained economic growth such as this one. They should raise taxes on their citizens and, if that is politically impossible, they should step up enforcement and eliminate as many loopholes as possible. Countries around the world are starving for revenue. They have hundreds of billions of dollars stored away in tax shelters that are completely immune from the influence of countries. There are many steps that the nations of the world can take the reduce the influence of these tax havens.

Currency Structure

In addition, countries need to look closely at their currency structures. Some currencies like the euro need to become more flexible in order to help smaller European countries pay off their massive deficits. Finally, countries have to be careful with their massive spending projects. They should primarily spend money in order to build up their own countries and the potential of their citizens. Debt should only be taken on to pay for the poor or to rebuild the roads and bridges that countries need to thrive.

Global debt may not be the catalyst to another financial crisis. There were almost seven decades without a major global recession and there is little indication that there will be another one anytime soon. But global debt can still become a major problem for the country and its economy. Global debt could mean the difference between a flourishing global economy and one that is constantly teetering on the brink of budget cuts and collapse.

Around The World – Investing In Foreign Currency

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Tweed-Economics

The global currency market is by all estimates the largest liquid financial market dedicated to currency trading. The market is largely unregulated and private with no intermediaries to guarantee compliance with regulations. According to Investopedia, the most popular currencies on the market are the US Dollar, the Euro, Great British Pound and the Japanese Yen. 

The US Dollar tops the list as it is considered an intermediary in triangular currency transactions and the unofficial reserve currency of the world. The Euro is a major currency used by many countries in the Eurozone, including Germany, France and Italy. The currency also ranks as the second largest reserve currency and the most traded after the US dollar. The Japanese Yen is easily the most traded currency in the Asian continent, especially in the Pan–Pacific zone. 

How to trade in foreign currency 

With the advances in technology, foreign currency trading can be conducted from anywhere in the world. The leading currency trading centers of the world include New York, London, Tokyo, Frankfurt and Hong Kong. Because of its vast size, a number of entities have been established to promote the trade. According to the Balance, online brokerages and margin trading accounts have in the recent times grown their market share in an industry dominated by banks and institutional investors. Investors can make the most out of the trade by understanding the underlying risks and benefits of currency trading. Below are key benefits of trading in foreign currency: 

• Access to a large and liquid global currency market 

• 24-hour operation and diverse trading styles 

• Opportunity to diversify the investment portfolio 

• Low cost of trading 

• No central exchange 

In terms of volume, the foreign currency market averages over $5 trillion in daily trading. The two main risks of trading in foreign currency are high leverage and high levels of volatility. High levels of market volatility are often caused by negative economic reports and weakened markets. When volatility becomes an issue, central banks are sometimes forced to intervene in order to stabilize the currency and the market in general. The other downside is that foreign exchange market makes very small increments, which tend to create high leverage. To improve long term returns and mitigate the risks, an analysis of risk-management strategies is crucial. 

Foreign currency trading outlook 

A number of platforms and instruments have been developed to enhance currency trading. Forex investors can invest in currencies either directly or indirectly using vehicles like Exchange Traded Funds (ETFs). ETF funds usually buy and manages currency portfolios on behalf of investors using effective trading tools like futures contracts and swaps. Investors who do not have a lot of money to put down can benefit from shorting strategies deployed by ETFs. The ETF is highly recommended for Investors who are not versed with the intricacies of foreign currency trading. 

For the inquisitive investor, the three leading ETFs for foreign currency trading are CurrencyShares, Wisdom Tree and ProShares. These ETFs trade in a wide range of currencies, including Chinese Yuan, Brazilian Real and Australian Dollar. If you are a seasoned investor, foreign currency trading can be interesting because you can make a side bet against the currency you are holding. Owing to insurance backup, Forex investors also have the opportunity to trade weak currencies without suffering undue negative exposures. 

According to a Forbes magazine report published in 2017, investors can make money in a volatile market through currency hedging. The strategy provides protection against losses emanating from negative currency movements, which often lead to uncertainty. For instance, as China moves into the marketplace with its reserve currency, investors worried about the future strength or weakness of the currency against the Euro and the dollar will find solace in hedging strategies. Concerns about China are heightened by prevalent stock bubbles, unpredictable real estate market and lack of transparency about the country’s debt. 

For investors in Europe, the prevailing low interest rates offers a perfect opportunity to off load currencies on the futures market at rates higher than the spot prices. The two leading currency hedge funds in the world today are WisdomTree Europe Hedged Equity Fund and iShares Currency Hedged MSCI EAFE ETF. According to the Forbes magazine, there are about 89 exchange traded funds with currency hedges aligned to their portfolios. These exchange funds account for about $40 billion of the $450 billion held in foreign stock ETFs. 

If you want to achieve long-term success in foreign currency trading, you need to learn continuously; acquaint yourself with prudent capital management techniques and understand the risks that lay I the way. It is also important to persevere because success may not be achieved overnight. For personalized training and assistance, you get in touch with an investment advisor who understands foreign currency investment and portfolio management.

Predicting China’s 2018 Economic Priorities

The priorities of the world’s second-largest economy are quite likely to shift in 2018, as those in charge of overseeing the Chinese economy seem to prefer a more cautious approach focused on protecting against the threat of a potential financial crisis. As a result, stimulating economic growth is no longer the chief concern of Chinese officials. According to several economic analysts familiar with the new priorities of the government, China’s 2018 economic growth target will remain somewhere around 6.5 percent, unchanged from the target set for the previous year.

Over the past year or so, China has sharpened its focus on limiting capital outflows and tracking down any potential “gray rhinos” — the unaddressed and eminently solvable threats that left unchecked might undermine the country’s manufacturing-driven economy. After capital outflows reached an unprecedented $725 billion in 2016, China instituted several policies designed to limit capital outflow. Those policies, as evidenced by the continued improvement in the nation’s foreign reserve funds, are rightly viewed as successful in achieving the government’s desired outcome.

This risk-averse approach is not necessarily welcome news for the local government officials with growth targets that still need to be met. In order to carry out its economic agenda, however, the current administration has expressed a clear willingness to part with any government official who disagrees with the economic plan as it currently exists. Given its firm belief in the course it has charted, it’s fair to predict that China will keep its interbank interest rates high while implementing additional policies intended to keep its money supply growth in check (a rate of 7 or 8 percent is a reasonable estimate).

China is also quite likely to reduce the pace of infrastructure growth, with its longstanding debt concerns representing the principal reason for the reduction. It’s also likely that the country will continue to shift its focus from an economy built on manufacturing to a consumer and services-based economy. As a number of other analysts have pointed out, growth stemming from such a shift is unlikely without further effort to promote the change, with tax cuts being the most frequently suggested strategy for realizing the potential gains of the ongoing economic transition.

Although Chinese officials are adopting a risk-averse approach with the goal of preventing a financial crisis, most authorities remain confident in the country’s ability to create a protective barrier around its financial and economic systems. In the view of these officials, such a barrier — along with the cautious economic plan it has outlined for this year — will effectively limit the impact of any internal or external shocks in 2018 and beyond.

Chinese Real Estate Investors Increasingly Targeting Big Cities With Strong Education Programs

Over the past few years, the United States real estate market has experienced an influx of foreign investment, with Chinese buyers continuing to outpace all other foreign real estate investors. While there has already been a great deal of discussion and analyses regarding the multitude of factors driving Chinese investors to put their money in U.S. real estate, until recently much less was known about why these investors ultimately prefer one particular geographic location over another.

Recognizing the inherent value associated with developing a clear understanding of the various factors at play during the decision-making processes employed by foreign real estate investors, a number of recent studies have identified several key reasons behind regional real estate demand. As a result, the data collected through these studies has made it possible to create a projection system delineating the specific U.S. cities Chinese real estate investors are most likely to target over the course of the next year: Los Angeles, San Francisco, Boston, New York, and Miami.

The projection is quite revealing for a number of reasons, including the fact that even a cursory review of the characteristics common among the five cities highlights the factors Chinese real estate investors find most appealing. In addition to featuring the nation’s most prominent cultural centers and strongest local economies, each of the five cities listed in the projection is also known for offering outstanding educational opportunities to its residents.

Whether it is the proximity to so many of the elite colleges and universities located in the city of Boston or access to one of the many outstanding public campuses associated with the University of California, Chinese investors clearly value educational opportunities when selecting real estate properties (obviously, New York and Miami are also home to outstanding academic institutions as well).

Of course, there are other factors to consider beyond access to exceptional academic opportunities, as Chinese investors also weigh the value of U.S. investment properties relative to international properties. The combination of its excellent public school system and comparatively low — in terms of both national and international prices — property costs are among the primary reasons that Los Angeles is expected to be the top housing market targeted by Chinese investors over the next year or so.

Weather also plays an important role as Chinese investors attempt to identify the ideal region for a real estate investment, so it should not come as much of a surprise that warm-weather climates like Miami and Los Angeles are among the top options in the United States. A lack of year-round sunshine is not necessarily a deterrent, however, as each city’s economic outlook as well as its unique cultural makeup also figure prominently among Chinese investors seeking U.S. real estate.

With all else being equal, Chinese investors appear most interested in properties that range in cost from $300,000 to $700,000. Even though property values vary widely among the five cities most likely to appeal to Chinese real estate investors during the year that follows, a price range of $300,000 to $700,000 still ensures access to a broad array of options in the part of the country that each individual investor ultimately concludes as most appealing according to their own personal preferences.

Chinese 10-Year Sovereign Bond Yield Surges By Record Amount

Yields on Chinese 10-year sovereign bonds soared by a record 22 basis points on Thursday hitting a 16-month high of 3.4%, prompting authorities to halt trading in some futures contracts. 10-year and 5-year government-bond future prices plunged by a record 2% and 1.2% respectively in early trading, leading yields to soar.

The global market selloff was sparked by comments from the Fed signaling a vigorous clip of interest-rate increases for 2017 and a plummeting yuan. While Wednesday’s announcement that the Fed would raise the benchmark policy rate by 0.25% had been foreseen, its promise to introduce three more next year caught many off guard.  Other factors exacerbating the selloff include concerns of frothy asset markets, accelerating capital outflows, and a liquidity crunch.

“The market was not expecting a change,” said Mike Amey, a portfolio manager at Pacific Investment Management Co., regarding Fed’s announcement to the Wall Street Journal. “You can see that in the reaction in the market.”

The Chinese bond selloff is part of a global trend. US Treasuries have also declined amid expectations of interest rate hikes, adding negative pressure to the yuan and making Chinese bonds all the less attractive to investors.. Germany and Australian government bond yields have jumped by 0.062% and 0.2% respectively. UK yields, in contrast, declined slightly on the back of a Bank of England announcement that it would keep interest rates stable.

Bloomberg adds other factors that have reduced the appeal of debt. Both globally and in China, inflation is expected to accelerate, driving up consumer and producer prices. Moreover, the People’s Bank of China has been driving up money-market rates to spur deleveraging. In response, Chinese banks have begun deleveraging and selling off bond holdings as assets have become more expensive to fund. Bond yields, in turn, have been following money-market rates.

Overall, the short-term outlook on global economic growth has brightened since Trump’s election, given expectations of deregulation, lower taxes, and higher spending. This has also encouraged investors to move away from bonds.

References:

http://www.wsj.com/articles/china-halts-trading-in-key-bond-as-panicky-investors-sell-securities-1481803121

https://www.bloomberg.com/news/articles/2016-12-15/china-s-record-bull-run-in-bonds-is-giving-way-to-a-market-rout

http://www.wsj.com/articles/bond-rout-deepens-after-fed-rate-signals-1481794245

http://www.econotimes.com/Chinese-10-year-bonds-yields-highest-since-Nov-2015-post-Fed-hawkish-outlook-heading-towards-350-pct-mark-451758