Central Perk: Mish's Global Economic Trend Analysis

duminică, 2 ianuarie 2011

Mish's Global Economic Trend Analysis

First Time On Record US Credit Spreads Drop Below Global Corporate Debt; Thoughts On Relative Value
Australia Heads For Economic Crunch; Similarities Between Australian and Chinese Stock Markets; Global Property Bubble Cycles
Sunday Funnies 2011-01-02 Good Luck Kid

First Time On Record US Credit Spreads Drop Below Global Corporate Debt; Thoughts On Relative Value

Posted: 02 Jan 2011 06:29 PM PST

The love affair with US corporate bonds continues unabated. Please consider U.S. Yield Spreads Fall Below Rest of the World

For the first time on record, investors are demanding a smaller premium to own U.S. corporate bonds than global company debt.

Bondholders require 166 basis points more yield to hold U.S. investment-grade company debt instead of Treasuries, compared with an average 169 basis-point spread worldwide, according to Bank of America Merrill Lynch data. At the height of the credit crisis in December 2008, companies had the disadvantage of having to pay about 150 basis points more to lure U.S. investors to their bonds than borrowers seeking buyers elsewhere in the world.

"With the strong stimulus package and QE2, I expect 2011 to be a relatively strong economy and corporate bonds tend to do pretty well in that environment," Brynjolfsson, who oversees $362 million, said Dec. 3 on Bloomberg Television. "Even if corporate yields rise a little bit it's likely spreads tighten, which corporate bond managers like to see."

I did not think corporate bond buyers were compensated for the risk in October, and I still do not feel that way now.

In October, people were plowing into IBM and Walmart 3-year bonds at .7% because treasuries were yielding less. 3-year treasuries are now 1%. This is the silliness of buying relative value when there is no value at all.

US corporate bonds may be a relative value, but who should care? Is there any value in them? I think not but those speaking their book argue otherwise.

By the way, I am often presented with the argument that IBM is less likely to default than the US government. This is my response: If the US defaults (which I highly doubt), you sure will not want to be in any US denominated bonds.

All of this relative bargain positioning, including PIMCO's love affair with Municipal bonds, is economic madness.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Australia Heads For Economic Crunch; Similarities Between Australian and Chinese Stock Markets; Global Property Bubble Cycles

Posted: 02 Jan 2011 12:25 PM PST

The party is over in Australia. Many anti-dollar investors and Pollyannas living down under just don't realize it yet. Nonetheless, Australia faces an economic crunch as family finances collapse under the burden of record debts, rising interest rates and utility bills.

Please consider Australians sinking under debt burden

With banks warning they will be forced to raise mortgage rates by 0.50 per cent in 2011 and Sydney rents forecast to rise by between $160 and $190 a month, according to analysts Residex, householders look set to suffer.

Repossessions and tenant evictions are expected to rise sharply. "It's going to be tough" said Shane Oliver, chief economist at AMP Capital. "Families face many rising costs and while most people have slowed their borrowing, our debt is still growing and that's a big problem."

Despite more cautious spending in recent months, household debt is still up by 5.8 per cent on a year ago and a recent survey by Westpac found only about 20 per cent of people thought paying off debts was the best use of their money. Most households in the US, UK and much of Europe are still busily paying down their borrowings, particularly unsecured debts such as personal loans and credit cards.

"Unlike the rest of the world, Australia has slipped back into its old habits," said Steve Keen, professor of economics at the University of Western Sydney. "We're spending ourselves right back into trouble. With so much extra debt to service, we don't need interest rates to reach anything like the 9.6 per cent they hit in 2008.

"We may find repossessions spiking much more quickly than they did two years ago."

Weekly Living Costs Up $100

Real estate has peaked and so has the shopping center economic model based on the strong Australian dollar. There is no reason here to like either Australian equities or the Australian dollar. Strong commodity prices will no longer help Australia.

Australian real estate has already been hit by rising interest rates and with Weekly living costs up $100, more rate hikes may be coming.

FAMILIES face cost-of-living increases that could drain the weekly budget by up to $100 this year.

New data shows Australians are being levelled with record expenses for basic services and Sydney residents are some of the hardest hit in the country.

After floods that have wiped out crops in Queensland and NSW, fruit and vegetable prices are predicted to rise by up to 50 per cent.
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Any hope the strong Australian dollar would shield motorists from increases in fuel prices have been dashed - global oil prices are tipped to hit record highs.

This year's price increases will compound the cost pressures already inflicted on households.

The trio of utility costs alone represents an extra yearly burden of about $1000 - or $20 a week - for an average household of four, while grocery bills are set to rise on average by $50 a week, based on a weekly bill of $150.

Housing affordability has taken another dive, with industry figures showing the largest annual decrease in a decade.

A report by the Real Estate Institute of Australia showed the proportion of income required to meet loan repayments increased 5.8 per cent to 34.8 per cent over last year, a 10-year high.

Additionally, the amount of rent people are paying has increased by 18.6 per cent in Sydney over three years, above the national average.

The Bureau of Statistics also identified health costs, communications services and petrol prices as having risen sharply over the year.

$AORD - Australian Stock Market Index Monthly

$AORD - Australian Stock Market Index Weekly

$SSEC - Shanghai Stock Market Index Weekly

Both the Australian stock market and the Chinese stock market have been weak. This is in spite of the fact that commodities have been on fire. Both countries have had overheating economies led by real estate bubbles.

It will be interesting to see how the Reserve Bank of Australia handles this. Failure to hike rates would hurt the Australian dollar and increase the price of imports while hiking rates further will crush the real estate bubble.

China's problem is far more complex. For more on China please see

There are no good solutions when the central bank lets real estate bubbles get out of hand as has happened in the US, China, Australia, Canada, Ireland, Spain, the UK and numerous other places.

The difference so far is the US, Ireland, and Spain property bubble have popped, while those in Australia, Canada, and China are just now facing the pressure.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Sunday Funnies 2011-01-02 Good Luck Kid

Posted: 02 Jan 2011 03:33 AM PST

For a look at problems for the new year, please see Ten Economic and Investment Themes for 2011

Whisper of a Thrill - Earth Song - By Thomas Newman

To get your mind off those problems, at least for a moment, please play this: