Busting Financial Jargon – Cheap Money
Cheap Money and Risk-on/off. The lingo in the finance sector can sometimes be confusing by design. Understand the language used by professionals in the Financial Markets space as we decode overused terms defining current Global Market Trends.
- Cheap Money
- Risk-on/Risk-off
You’ve begun listening to Financial Market Radio shows and tuned in to Bloomberg/CNBC and Business Day TV. Perhaps you are a “newbie” and still find some of the terminology difficult to process. No sweat, we’ve got your back. Consider Unmask Africa’s monthly column your guide to demystifying the Financial Markets. Give us 4 minutes of your time to read our market article and we’ll convert you into an (armchair) expert, able to steal the show at the next barbecue.
Cheap Money
So the buzz on the streets is that, globally, there is “Cheap Money” in circulation. This sounds counterintuitive! If money was “cheap”, how come it’s so hard to come by? Cheap Money refers to money that is lent to Retail Banks at a relatively low interest rate (yield). Global interest rates are currently at record lows, last seen at the turn of the 19th century.
This means that US Retail banks have to pay 1.75% p.a. for Overnight Deposits. Their counterparts across the Atlantic are paying the Bank of England 0.50%, while the Japanese receive overnight deposits at -0.1% (That’s right the Bank of Japan is effectively paying them to hold deposits (more of that in a later article). In short, Investment Banks are able to borrow cash from their Central banks at next to nothing. The term “Cheap Money” therefore refers to the low yield at which cash can be borrowed from Central Banks and put to work in financial markets.
Risk-On
Now that Investment Banks have received their cheap money the dilemma becomes what to do with it. Do they invest it in 1st world economies where yields are low but generally more stable, or move it to emerging markets where yields are higher but less stable? The answer is, it depends. Should the global economy and political environment remain stable in the country or market of interest and money remains cheap, investors can afford to seek higher yields or take on more risk. This is referred to as the “Risk-On” trade or “Risk –On” position.
Risk-Off
If the Global Economy falters (the Orange bigot’s threats become actual policy decisions) and the US, for example goes to war or similar. The future of money being available on the cheap may be under threat. Investment bankers can therefore ill afford to take additional Risk. They would then consolidate their investments by moving them to more traditionally stable economies. This is known as the “Risk-Off” trade or “Risk-Off” position.
Keep reading our articles and you won’t have to flinch at Financial Market jargon anymore.
Happy Investing!
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