One picture understanding: Risk assets vs. safe haven assets 01. What is a safe haven asset? Risk aversion motivation and asset types Safe haven assets refer to assets whose intrinsic value can remain stable even when other assets experience significant fluctuations. Safe haven assets have two basic characteristics: resistance to decline and high credit. The so-called resistance to decline. During the general decline in asset prices, safe haven assets need to fall even less. The so-called hedging means minimizing losses as much as possible. The so-called high credit. Only Gaoxin can have high liquidity and maintain a stable pricing advantage in the discount process of most other assets. This is also the source of "resistance" in the value of safe haven assets. There are roughly three levels of risk scenarios, and different types of hedging assets perform differently in each of the three scenarios. The first level of risk scenario is economic recession risk (deflation scenario, downward demand+loose liquidity). The second level of risk scenario is political order conflict (stagflation scenario, demand downturn+supply constraints+liquidity tightening). The third layer of the risk scenario is the reconstruction of the financial order (challenging the position of the world's currency, with downward demand and currency dilemma). 02. The first type of risk avoidance scenario is a typical deflationary scenario (monetary easing+downward demand). ① General rule: In the ranking of safe haven assets, bonds are the best, currencies and gold belong to them, and commodities are the weakest. ② One of the structural laws: During deflation, which country has a greater degree of monetary easing and better relative bond yields; Conversely, currency is relatively weak. For example, in 2001, Japan experienced more severe deflation, greater monetary easing, and significantly better Japanese bonds; The Japanese yen is relatively underperforming. In 2008, the United States was the initiator of the global financial crisis, with a large degree of monetary easing, a relative advantage in US debt, and a relative weakness in the US dollar. ③ Structural Law 2: Assets that can map growth potential during deflation will not perform too poorly, while assets related to the source of deflation will perform weaker. For example, the Internet foam in 2001 increased Japan's deflationary pressure, and Japanese stocks and yen were weak. In 2001, the potential momentum of the US real estate market was strong, and the US RETIS performed the best at that time. On the contrary, the 2008 global financial crisis originated from the subprime mortgage crisis in the United States, so the performance of REITs in the United States was the worst during the deflation process from 2008 to 2009. 03. The second type of risk aversion scenario, a typical stagflation scenario (monetary tightening+downward demand+supply contraction). ① General rule: In the ranking of safe haven assets, commodities and gold are the best, followed by currencies, and bonds are the weakest. ② One of the structural laws is that the underlying development potential of different countries varies during the stagflation process. Countries with strong development potential can have stronger currencies. For example, from 1973 to 1974, Japan was in a period of vigorous development, so the Japanese yen was significantly better than the British pound and the US dollar at that time. In 2022, due to fiscal expansion and technology capital expenditures, the US economy stood out and the US dollar was significantly better than other currencies. 04. The third scenario of risk aversion is the reshaping of the global financial order (currency dilemma+downward demand). ① General rule: In the ranking of safe haven assets, gold is the best, while bulk and world currencies perform the weakest. ② One of the structural laws: During the period of financial order reconstruction, gold is the most certain asset. At the same time, the world currency, which was the anchor of the financial order at that time, performed the weakest. During the process of restructuring the financial order, global demand has been suppressed and the performance of bulk commodities has been weak. ③ Structural Law 2: During the period of financial order reconstruction, a type of currency other than the world currency is seen as a substitute for the world currency and often performs well. For example, in the 1929-1930's, the British pound depreciated and the US dollar appreciated relative to the British pound. During the 1961 US dollar crisis, the Japanese yen appreciated relative to the US dollar. Why can bonds be used as safe haven assets? Bond prices fluctuate with interest rates, so bonds are not without risk. There are two main reasons why bonds are called safe haven assets: Fixed income: Its attributes result in relatively low risk, making it more suitable for low-risk investors or safe haven investors Its price fluctuations and economic cycles: other major asset classes show weak or negative correlations, which can play a role in diversifying risks Firstly, traditional bond assets are also known as fixed income, meaning that holders receive a "fixed" amount of repayment at a "fixed" time. Although the price of bonds may fluctuate with the level of interest rates, if you hold a bond at maturity and reinvest it without considering interest, the total income you receive at maturity is fixed, and the main risk you face is default risk (for long-term bonds, you should also consider inflation risk). In the case of holding to maturity, regardless of whether the economy is good or bad, your investment returns can be basically guaranteed. Therefore, it is often said that bonds are relatively low-risk investment products, and naturally become a safe haven tool in the eyes of "risk averse" investors. Secondly, since the 1990s, as people's understanding of financial products deepened, there has been a noticeable differentiation between bond yields and stock yields. There is a significant weak or even negative correlation between bond yields and stock yields. That is to say, when the stock/cryptocurrency market is unstable and declining, bond prices may actually remain stable or even rise. Therefore, for most stock/cryptocurrency investors, bond assets are a "safe haven" tool that can effectively diversify risks.