risk free assets

Most governments' bond in developed countries were considered risk free assets. No more. Right now, only Germany, U.S. Canada, Aussie Japan and U.K's bond are considered risk free. However, you still face currency devaluation among these countries because of potential money printing. That's probably the most important reason why gold is up so much.

The dry out of funding to European countries ex Germany has made the financial market very volatile. The valuation matrix is confused because the risk-free rates are changing rapidly. If you can buy government Italy bond at over 7%, how much you will demand to own Italy corporation bonds? The required return on equity will be at least 12%. That's the challenge the market faces.

ECB and European debt solution

The market seems believing that there is a simple solution to the European debt problem and blaming that politicians for not acting. I question that wisdom. To me there is no valid solution short term but through long hard cuts on social warefare.

One easy solution which everyone from Obama to Sarkosy to Cameron and Putin (except Germans) believe is for ECB to be the lender of last resort. The problems with this solution are two folds. 1. First, fundamental fairness. Who is going to decide buy which country's debt. Why help Italy not Spain? At the end of day, buying debt is a subsidy to the country. Second, ECB buying will incentivize politician to increase deficits. It is much easier to get elected by promising more warefare and tax cuts than cutting spending and higher taxes.

China's impact on steel and Base metal

The debate whether there is a soft or hard landing in China is raging on. But one thing is clear, the investment led expansion is slowing down. The two major engines for investments led growth are high speed rail and real estate. Both of them slowed recently. Real estate sales in major cities are down from 30 to 50%. The safety issues and short of capital has slowed high speed railway construction. According to official figures, 70% of the projects have stooped. The impact on base metal are negative. The impact on steel is the biggest, which extends to iron ore and coking coals.