Stocks down, bonds down, crypto down, commodities up
All asset classes are impacted by risk-off sentiment
Tough times in financial markets. Investors are selling assets across the board to raise cash. The US Dollar is still playing its role of safe haven in volatile times: It is at 2-year high against the Euro and a 20-year high against the Japanese Yen. Why is the world now facing high commodity prices and rising yields? Listen to IMF Managing Directors Kristalina Georgieva explain it in simple terms:
What is going on in Japan?
While the rest of central banks are increasing short-term rates and letting long-term yields rise, the Bank of Japan has been implementing Yield Curve Control. It is buying unlimited amounts of Japanese bonds to prevent the 10-year yield from risking above 0.25% (it is at 2.9% on US government bonds). The Central Bank is deliberately sacrificing its currency rather than letting yields rise. And the impact is brutal: the Japanese Yen has lost 12% of its value in just a month. Jim Bianco explains what is going on in the thread below and in the podcast interview here.
Why should you care about what is happening in Japan? Because if or when the Bank of Japan gives up on Yield Curve Control, you can expect yields in other currencies to rise too. The Bank of Japan is indirectly bankrolling a large carry trade: Investors borrow in Yen or short government of Japan bonds and invest the proceeds in US Dollar bonds that offer a higher yield. Once the carry trade ends, the demand for US Dollar bonds will drop, likely causing a rise in US Dollar yields.
IMF Global Financial Stability Report and Crypto
This week was the week of the IMF and World Bank Spring Meetings in Washington DC. In this context, the IMF released its latest Global Financial Stability Report. The report talks about how crypto could be used to evade sanctions (but aren’t currently in any meaningful way) and how Bitcoin mining could be used by (sanctioned) countries to monetize their energy resources. For a quick summary of the section on crypto assets, you can listen to this 15-minute Coindesk podcast episode.
Global Food and Energy Commodities
If you want to understand why food and energy commodities are likely to remain high for the foreseeable future, listen to this interview of Doomberg—one of the most read finance writers on Substack—on the Hidden Forces podcast.
The ongoing lockdown in Shanghai is also likely to result in a deterioration of the situation. See below the map shared by Scott Gottlieb.
High commodity prices are starting to hit German producers hard, really hard. Their production costs are up 31% year-over-year.
We Study Billionaires | Balancing Financial Goals with a Fulfilling Life with Peter Mallouk
Peter Mallouk is the President and CIO at Creative Planning, which currently manages $210 billion of assets. He is also the author of the book titled The 5 Mistakes Every Investor Makes and How to Avoid Them. In this interview, Peter talks about stocks, bonds, crypto (he is not a fan!) and how to manage your portfolio during periods of high volatility.
Finally, with markets being difficult to navigate at the moment, I want to leave you with a great quote on leverage:
"If you're smart you don't need it, if you're dumb you shouldn't be using it."
Warren Buffet