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Tightening Too Much Will Break It

The crucial season of central banks policy meetings has begun and till now decisions are undecided. On one side China has reduced the reserve ratio to provide liquidity as the system faces default risk from some real estate companies. On the other side, Federal Reserve and other major central banks have started reducing liquidity to clamp down on the high inflation.

If you imagine the financial world as a clock where government stimulus and central bank policies are the critical parts of it. Then the present stage can be defined where major parts are started to behave in such a way that just might lead to the broken clock.

This would be a catastrophic event especially when the world discovered another variant that can result in a change of pandemic direction and not in a good one. Thus, it would be a choice of tightening with very large portions of caution not only because of the virus but also the risk it poses on the progress made to date.

Though the parts have already started to break, as Evergrande has officially defaulted first time on foreign bonds and the promoter is not in the good books of Xi. This will not remain an isolated and insulated event as many bondholders will start to write off the outstanding positions even if the restructuring does go through.

Events like this will be expected in the next three months as the "oil" refers to the liquidity starting to dry off bringing the rusted or damaged parts to breaking point.

Do remember the notional gains are not yours till booked, So it better to pay tax than lose it to the greed of own.


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