Risk, Not Volatility, Is the Real Enemy
For starters, the meaning of volatility and risk is the same. Volatility is a measurement of price fluctuations of a security, portfolio, etc. over a period of time. These fluctuations are invisible once we venture away from assets like bank fixed deposits, overnight or liquid funds, etc. Risk on the other hand is the chance of losing your money or failing to meet your financial goals and obligations.
Focusing on short-term losses inappropriately confuses risk and volatility. Understanding the difference between the two and focusing more on risk and not volatility is a key way to make sure to achieve our financial goals.
“It’s easy to see how the two terms have become conflated. If you have a short time horizon and you’re in a volatile investment, what might be merely volatile for another person is downright risky for you. That’s because there’s a real risk that you could have to sell out and realize a loss when your investment is at a low ebb.
On the flip side, some of the most volatile investments (namely, stocks) may not be all that risky for you if they help you reach your long-term financial goals. And it’s possible to completely avoid volatile investments but come up short in the end because your safe investments only generated small returns.”
What is Federal Reserve doing currently?
It would not be an exaggeration when I say, Indian traders keep an eye more than even most of the traders across the world as we all love tracking SGX and US Markets.
Global financial market participants always keep an eye on the US Federal Reserve. Especially more so from last year or so, as we are all facing the consequences of what this central bank and others have done over the last couple of years.
If we were to name only one main reason (there are multiple factors of course) for the unprecedented rise in global stock markets during the pandemic, It can be summed up in one word: QE (Quantitative easing) and one of the major fears that the market is having right now can be summed up in one word: QT (Quantitative Tightening)
Here’s an excerpt from the article about what is QE & QT :
QE creates money. QT does the opposite: it destroys money.
With QE the Fed creates money that it then pumps into the financial markets via its primary dealers, and this money is used to purchase assets, and as this money chases assets, it inflates asset prices of all kinds, which means it drives down long-term interest rates, including mortgage rates, which further inflates home prices, etc. This is the officially stated reason for deploying QE.
With QT the Fed does the opposite. QT reverses QE. QT destroys some of the money that QE had created, with the opposite effect on yields and asset prices, home prices, etc., driving up long-term interest rates and deflating asset prices.
The Fed is now tightening its policies – raising rates and kicking off QT – because inflation has exploded to a 40-year high, has spread across the economy and deeply into services, and is becoming solidly entrenched. This inflation is in part a result of QE. And QT is one of the tools the Fed is using to crack down on inflation.
Do read this article as it further elaborates on what exactly the fed is up to:
Don’t Rue the Rupee’s Fall.
Rupee hits an all-time low, rupee falls against the US dollar… This is probably one of the most common headlines you all must have come across these past few days. But is the fall in the Indian currency as bad as it’s being portrayed? Or is there nothing negative about it besides inflation?
The falling rupee seems to have several positive effects, including higher export income, improving asset prices, and greater domestic investment. Higher interest rates, which come as a result of controlling inflation also attract more dollars, which boost asset prices and investment, which in turn aids in demand for consumer durables, construction, housing, capital goods, etc.
China and Japan deliberately kept their currencies weak because it bought them more time to scale up their low-tech, uncompetitive economies. So it seems, that the slide in the rupee is not bad after all.
Raghav Bahl, the co-founder of the Quint Group explains the positives of the falling rupee in the article below.
What is the Economic Value of Equity (EVE)?
EVE defines the difference between assets and liabilities according to their respective market values. It reflects how assets and liabilities would react to changes in interest rates. This is because it represents the income or loss a company faces during a chosen horizon.
Many countries and important economies all over the world are hiking interest rates or are following this path. This effect is not just macro on the whole, but also affects a company’s balance sheet. The effect differs according to how heavy and active the company’s assets and liabilities are.
The EVE metric looks at the cash flow calculations from netting the present value of the expected cash flows on liabilities, or the market value of liabilities, from the present value of all expected asset cash flows, or the market value of assets. This paper moves on to discuss acceptable EVE and its impact on and off the financial stability of the company. It also explains the effectiveness and protective factors of the current scenario of rising interest rates.
