China
The Chinese stock market has probably been the hottest market over the last year. While exciting for the time being, I don’t trust it one bit. The Chinese economy has been supported by an unsustainable increase in credit the past few years and the bubble has the potential to pop at any moment. There have been interviews lately with some people that are well connected with the executives of the major Chinese corporations, and word is that they’ve been instructed by the government to prepare for the purposeful bursting of the credit bubble. They have plans in place to pick up assets on the cheap after prices collapse as part of the government’s plan to consolidate their State Owned Enterprises (SOE’s) to a handful of “Super-mega SOE’s.” The Chinese are letting the stock market run for the time being to use the inflated market caps of the SOE’s to consolidate. This last leg of the move higher in Chinese stocks took off after opening a connection between mainland China (Shanghai) and Hong Kong’s market, giving foreign investors the ability to buy A-share stocks instead of the H-shares traded in Hong Kong or simply the ADR’s traded in the US. My opinion is that they’re sucking in foolish foreigners to be left holding the bag before popping the credit bubble.
Their current president, Xi Jinping, is probably the most totalitarian leader of the communist party they’ve had since Mao and part of his campaign to clean up corruption is simply to gain full control by weeding out any dissenters. This is just my speculation, but from connecting the dots, it seems clear to me that Jinping is setting the stage for even greater government control as he is all for full-fledged communism. Opening the markets to foreigners and then letting the credit bubble pop will give him an easy out to blame “Western capitalism” for the collapse of asset prices in order to gain the people’s support for further government control. The inevitable end to the Chinese credit bubble is probably what I’m most concerned about right now – for all asset markets – and the run-up in Chinese stocks makes me think we’re getting close.
Interest Rates
Intermediate and longer dated yields had been falling the past few months but reversed course about two weeks ago. Lately, the yield curve has been steepening with longer dated bonds getting hit the hardest. You can tell it’s been driven solely by a rise in European rates though, not economic data or concerns over the Fed raising short-term rates this year. In particular, the German 10-year bund (that’s not a typo –their bonds are “bunds”) has been leading just about all other bond markets as the ECB is now embarking on their own QE program to buy government bonds. Yields on the German 10-year fell all the way to 0.05% but have recently reversed course, after a few well known bond “kings” made some claims about the short of a lifetime, and are now trading around 0.60% – a very volatile move in a short period of time! With it, all other government bond yields have been rising as well (yields rising).
The recent data has not been strong, implying the Fed will delay raising rates since they’re being data dependent. Accordingly, the US dollar moved lower (since it’s been strengthening on the expectation of higher rates/policy divergence here in the US). This should have sent yields lower, not higher, which says we’re still simply mimicking European yields for the time being. In my opinion, I still don’t think we’ve seen the low in US intermediate and long-term yields yet.
Stocks
US stocks have been range bound all year and are basically tracking the Fed’s balance sheet (QE ended and the stock market’s rise has ended, for the time being). Japanese stocks have continued their climb higher on QE and the Japanese Government Pension Investment Fund’s change to increase its allocation to stocks, both Japanese and international. We have some exposure to Japanese stocks but most of it is currency hedged to protect against the falling Yen. European stocks have had a strong start to the year as well, mainly on QE optimism. However, buying European stocks simply because the ECB is embarking on QE is a dangerous game. The consensus opinion is that QE made stocks go higher in the US so it will push stocks higher in Europe too. A) The general consensus is usually wrong. B) Europe is a totally different economy from the US and QE will have different effects. In my opinion, buying stocks simply because of QE is playing with fire. We have little to no exposure to European stocks, FYI.
Why is it that the stocks I do want to buy/buy more of never seem to fall? Still waiting for better prices…
I hope everyone is enjoying the warmer weather and thanks for following!
-Nick
Like what you see here? You can subscribe via email by using the box in the top-right corner of this page.