Global financial observer Dr. Robert Peng
Recent global financial trends have been analyzed from the perspective of the chairman of the US Federal Reserve. According to their statements, the consecutive and significant interest rate increases at the end of April and beginning of May (which I have not seen in my nearly 30 years in the financial industry) have caused two rare instances of interest rate inversion, leading to a series of bankruptcies in the US and global financial sectors. Banks or investment banks such as Credit Suisse, Silicon Valley Bank, and First Republic Bank, which have long been followers of the US Federal Reserve, fully cooperate with their observation results and decisions, adjusting their operations accordingly. For example, during a long-term rise in interest rates in the US, positions in long bonds (10 to 20-year government bonds) should be reduced, while short-term bond transactions should be increased. However, during the period of interest rate inversion, these traders in the bankrupted banks followed the lead of the Federal Reserve and bought a large number of long-term bonds at a low-interest rate (most of which were traded at around 3%). After the interest rate inversion returned to normal (long-term bond transaction rates were between 4.8% and 5.20%), these financial experts realized that the positions established during this period resulted in huge unrealized losses, seriously affecting their capital turnover and scheduling abilities, ultimately leading to bankruptcy.
This event tells us that there are variables and exceptions in everything, and we can’t manage such a significant portion of assets with just one approach. It is necessary to constantly observe and analyze various anomalies to be able to go far and succeed.
The Federal Reserve’s rapid rate hike in the short term has caused a rare “inverted yield curve” phenomenon in a century, rendering past empirical rules followed by humans ineffective. Several international reinsurance companies refuse to compensate for the pandemic, leading to losing credibility in the global market. Domestic large insurance companies suffered heavy losses, whether claims from property insurance or the bond investment department within the insurance company. I assume these losses can’t be recovered within two to three years. Also, I expect that such bizarre phenomena will continue to occur.
The original goal of the Federal Reserve’s rate hike was to combat inflation. However, based on official data, the CPI in the United States in April increased by 8.3% year-on-year, higher than the market’s 8.1% and still at a near 40-year high. Excluding the relatively volatile energy and food prices, the core inflation rate was 6.2% year-on-year, still higher than the market’s expected 6%.
We also observe the nominal GDP in the fourth quarter of 2022 in the United States. According to the latest data from BEA, it is 23.3 trillion US dollars, with an annual growth rate of 6.9 trillion US dollars. The real GDP is 19.5 trillion US dollars. GDPNOW model predicts that the annual growth rate of real GDP in the first quarter of 2023 in the United States is 1.1%, lower than the previous quarter’s 1.6%. Taiwan’s first-quarter GDP for this year was negative, 3.2%, indicating signs of a recession.
It’s recommended that readers of this column operate the stock market steadily and conservatively this year, for example, by investing in fixed amounts regularly and selecting qualified stockbrokers for long-term investments. Alternatively, choose corporate bonds issued by top-rated US companies in the previous period (their annual interest rate was still between 4.5% and 4.8% then, and the current bond issuance yearly interest rate is still above 4.0%). Our company specializes in developing first-hand secured corporate bonds for small and medium-sized enterprises (with a capitalization of less than 1 billion NT dollars) in Taiwan. We aim to help small and medium-sized enterprises in Taiwan solve the pain point of obtaining long-term funds and produce some high-quality corporate bond products for investors. Two to three corporate bonds are expected in June, with a five-year secured bond with an interest rate between 4.8% and 5.2%. Stay tuned.
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