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The Inconvenient Truft 2

The Inconvenient Truft 2

Economics 101 taught me that money is a store of value as well as a medium of exchange. It is an indicator of wealth and enamours most people of almost all nationalities.

However, the Global Financial Crisis (GFC) has certainly changed that – Money is now an instrument of public policy where global Central Banks (CB) dish out via series after series of Quantitative Easing (QE) measures. In total, the US Federal Reserve, China’s PBOC, Europe’s ECB and Japan’s CB have dished out more than US$10 trillion since 2009, yet the world is still not a better place with respect to financial stability and prospects for growth.

The generous dishes of QE have resulted in ultra-low bond yields and higher stock market valuations. However, many investors are skeptical if indeed these higher stock market valuations are a reflection of higher corporate earnings prospects.

2015 started with the ECB commencing its QE and vowing to “do what it takes” to purchase bonds with newly minted money in order to lower interest rates, again without any thought to the nature of the money or when these borrowings would be repaid. So is money still a store of value?

Back in Economics 101, we were taught that a bond is a promise to pay money in the future with an interest. However, it seems that through the series of QE measures, the nature and quantity of all these newly minted money are for the global CBs to print and mint at their discretion. So is this manipulation?

Economics 101 teaches that bond prices have inverse relationships with bond yields. Thus, current historic low yields attached to sovereign bonds mean that bond prices are perhaps the highest ever. So is this a big bubble?

When I look at US Treasury yields, I shudder and shake at the fact that it has been falling for almost 30 years. I shake and sink further when I wonder how will these US$10 trillion of newly minted money be paid. Or will they ever be repaid?

Investors don’t even need to watch The Hobbit to know that CBs do possess mystical powers to print and preen. Will these mystical powers destroy the financial system if the bonds cannot be repaid?

Or how it will be repaid? Via more refinancing at lower rates of the same mystical bonds?

Indeed, I can feel the tumor of QE pervading the global financial bloodstream. In the major financial centres of New York, London, Hong Kong, Tokyo, Singapore, Frankfurt, Geneva and Zurich, QE and zero % interest rates are now the financial non sequitur.

So how will it end?

Gabriel Yap
Gabriel Yap

Mr Gabriel Yap,CFA was an eminent stockbroker who retired from stockbroking in 2009 to devote himself to philanthropy to help the needy, poor and handicap globally. He has donated and assisted Charities Aid Foundation, Australia (CAF), a not-for-profit donor funds management business.  

Mr Yap is also Executive Chairman of GCP Global Pte Ltd, an investment firm that invest in both direct capital markets, bonds, real estate, commodities, foreign exchange and builds businesses. Mr Yap appears regularly for the TV media like Channel News Asia and Bloomberg and radio channels like FM93.8 for their various investment programs.

Previously Mr Yap has also lectured at renowned government institutions like the SEASEN Course for the Monetary Authority of Singapore and at AsianDevelopment Bank. Mr Yap has also lectured at financial institutions like the Stock Exchange of SingaporeInstitute of Banking and Finance, the Institute of Certified Public Accountants, the Singapore Institute of Management and the Securities Investors Association of Singapore.

In 2010, the venerable Reader's Digest magazine created the Money Savvy column in their magazine, helmed by Mr Yap who writes on all things finance and answers questions from the magazine's subscribers.

Mr Yap presently splits his time between Melbourne, Europe and Singapore.