Anyone can be on the wrong side of financial markets

Take the example from Thailand in which the central bank’s Monetary Policy Committee (MPC) recently voted unanimously to maintain its policy rate at 1.50 per cent, though some market participants expected to hear just a hint towards the easing path.
Were traders and market believing they are wrong? If they were, they should sell bonds with returns less than the cost of funds.
However, the market accepted the MPC’s decision and kept on buying more bonds although current yield from the entire government-fixed income products that will mature in five years is way under the policy rate.
If the market is right, then who are actually going in the wrong direction? Central banks? Market experts? Or plain investors?
Let’s discuss the central banks first. There is no doubt that they are very discreet as conductors of monetary policy.

What did they actually do |recently?
Not only were there more than 600 rate cuts around the world since the fall of Bear Sterns, central banks also printed new money and bought financial assets by no less than US$12 trillion over the past eight years.
As a result, there are 500 million people currently living in countries with official negative interest rates and more than $8 trillion of government debts yield zero per cent or less.
Central banks say that they just aim to provide some discounts to the economy and spur inflation. However, given years of policy intervention, the global economy is weak, disinflated, and markets seem to rebel against central banks’ quantitative easing programmes.
Are they doing something wrong?
It is really hard to determine but what we have learned from the past decade is that “central banks printing money leads to hyperinflation” is a narrative that produces false memories.

How about the market experts? Did they do something wrong?
An asset manager’s recent recommendations might be able to exhibit market geeks’ thoughts, since fund managers invest in all asset classes around the world.
From the beginning of this year, most of them have recommended two crucial trade ideas.
First, they mention that stocks are far more interesting than bonds this year, citing that interest rates are going to rise and, therefore, bond prices will drop.
Second, regarding stocks, almost all of them have recommended that we invest in Japanese and European equity markets, suggesting that the policy easing by central banks is there to protect your investment performances.
These recommendations could prove no wrong, if and only if the central banks’ actions are all right.
As a matter of fact, the markets just behaved totally in a reversed direction since the beginning of the year.
Treasuries around the world gained around 3 per cent. Some stock markets performed better than that but Euro Stoxx and Nikkei, which are two common gauges for European and Japanese equities, made negative returns of almost 10 per cent.
What do they teach us?
In financial markets, when people are wrong, almost all the time, they are just taking action too early or too late.
If we think that those actions come too early, it means that the US economy is just about to leave its deflation cycle while the euro zone and Japan are still in a deep deflation period. In this case, we should expect to see bullish bond markets and the banking sector in the United States.
But if they just make a call too late, it means that the US economy will enter an inflation cycle very soon while the rest of developed economies are about to end their short-lived expansion period. In this case, the bond yields would start to rise shortly while commodities should outperform most markets.
In Thailand – based on my assessment on bonds, the banking sector, and the macro-cycle – it is likely that we are living somewhere between the late-deflation and early-expansion cycles where the bonds should still outperform the stocks and the banking sectors are going to perform soon.
Perhaps I am wrong too. What I am trying to explain is that you have the full right to choose whatever you like and do not worry about being wrong. Financial professionals are not always right either.
In the financial markets, the world is not all sunshine. The market will beat you down no matter who you are if you let it. It’s not about how many times you are right. It’s about how fast you can spot the right directions, fix your portfolio accordingly, and move on. That’s how the profitable trader works.

Views expressed in this article are those of the author and not necessarily of TMB Bank or its executives. Jitipol Puksamatanan is a global economist and currency strategist at TMB Analytics. He can be reached at [email protected].