Mish's Global Economic Trend Analysis |
- How the Junk Bond Bubble Supports Rising Equity Prices
- China Hikes Rates Another Quarter Point; How will this Affect China's Stock Market and Property Bubbles?
- Florida Gov. to Overhaul Medicaid, End Defined Benefit Plans for New Public Workers, Require 5% Contributions from Existing Employees
How the Junk Bond Bubble Supports Rising Equity Prices Posted: 08 Feb 2011 03:49 PM PST Yesterday, I was asked about statements I have made on numerous occasions that the recovery of the junk bond market helps explain the rise in equity markets. Here is the specific question: Mish,Let's go over the reasons once again.
Everything changed when Bernanke stabilized junk bonds. Interestingly, Bloomberg discussed this situation today in Top Stories. Maturity Wall Crumbles as $482 Billion of Debt Refinanced The wall of bonds and loans maturing through 2014 has crumbled by $482 billion, or 44 percent, since 2009, reducing the threat of defaults and allowing companies to bring riskier deals to market. The amount of debt due in the next four years dropped to $671 billion, from $1.2 trillion in 2009, according to JPMorgan Chase & Co.How much better can things get, especially with treasury yields soaring? I believe junk bonds are priced for perfection and equities priced well beyond perfection. Please see Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think for details. As I have said many times, when this all matters is anyone's guess. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List |
Posted: 08 Feb 2011 11:49 AM PST China hopes to dampen inflation with another quarter point hike. Can China's strategy of baby-step rate hikes work given credit is expanding at 35% a year with GDP rising less than a third of that? Please consider China hikes interest rates again to damp inflation China's central bank raised interest rates for the second time in just over a month in a bid to dampen high inflation and guide blistering economic growth to a sustainable level.China's Real Estate Bubble Continues to Expand Hiking rates a quarter point a pop reminds me of Greenspan's policy of hiking rates at a measured pace. US speculation in residential real estate went on for another three years, followed by another 18 months of commercial real estate speculation. In theory, China has other options given the nature of its command economy. Then again practice is a different matter given China's expectation to grow 9-10% a year. Currently it is taking credit growth 3-4 times GDP growth to achieve China's growth target. Something has to give. Can China grow 10% without huge investment-driven growth, without rampant credit expansion? What about speculation in the stock market? Michael Pettis at China Financial Markets expects the Chinese stock market to be firm until President Hu Jintao and Premier Wen Jiabao retire next year. I am not so sure. It is quite possible a series of hikes weighs on the market. Besides, stock market rallies per se will not help China achieve its GDP targets. In a newsletter Pettis writes ... I am moderately bullish, but not because of GDP growth. I am bullish about stocks mainly because it seems to me that hot money inflows, rapid credit expansion, and the impact of still-rising inflation on real interest rates (which are already negative) will mean that money continues flowing into asset markets.When Do Imbalances Matter? At some point, China will be forced to address massive imbalances in its investment-driven growth model, make numerous market-driven changes in its banking system, and address the untenable nature of its growth targets in general. Will the stock market and China's economy wait for a leadership change or will the market force some changes via CPI spikes before then? I suspect the latter. Moreover, it's entirely possible the series of quarter point baby steps hikes weighs on the equity markets sooner than expected, especially if the frequency of those hikes increases faster than expected, even if credit growth continues unabated. Regardless, long term growth targets of 10% that take credit expansion 35% a year is not a sustainable situation. Nonetheless, when China's imbalances matters is a subject of speculation. That the imbalances will be addressed by China voluntarily, or the markets forcibly, is not. China bulls have not factored this setup into their models. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List |
Posted: 08 Feb 2011 02:25 AM PST Florida Governor Rick Scott is planning sweeping changes that has public unions howling but corporations thrilled. Budget Plans
The Wall Street Journal has more details in Florida Governor Seeks Cuts in Budget Gov. Rick Scott called Monday for overhauling Florida's Medicaid program, curbing its pension system and trimming government services as he detailed a budget proposal he had promised would be full of big cuts.Battle shaping up over pension proposal The Miami Herald has some additional details in Battle shaping up over pension proposal Florida's pension system is currently funded by state and local governments contributing the equivalent of between 9 and 10 percent of an employee's income toward retirement. In the case of high-risk workers like police and firefighters, the percentage is higher.Right Moves These are exactly the right moves. I commend the budget plan. Scott's plan will put money in the hands of taxpayers via lower property taxes and require public union workers to pay their share. Hopefully Governor Scott can get all of his proposals passed and other states follow. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List |
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