Turning Points: Abenomics Sputters, German Bond Yields Fall

Abenomics looks shaky as Japan revised 2014 second quarter GDP growth down to −7.1% on the heels of its escalating sales tax (from 5 to 8%). Ominously, consumer prices are rising but wages are declining in real terms (by roughly 6%), creating significant difficulties for the Japanese economy. Should this trend continue, Japan could find itself in a crisis of epic proportions. The European Central Bank (ECB) also announced a more aggressive monetary policy, which should increase inflationary risks globally.

German bond yields are declining — negative nominal yields on short-term bonds and 10-year bonds now yield less than 1%. Speculative junk bonds are getting another boost from banks in Europe as well as Wall Street creating new products to capitalize on junk bonds through derivatives.

While the markets remain at all time highs, the underlying health of markets and economies remains suspect. When all the facts are taken in combination, there appears to be a growing unease in the markets. Review today’s time capsule (at the bottom) to be sure you recognize the next crisis when it comes.

Here’s a wrap-up of key issues affecting global markets for fundamental investors.

Currencies

• When France wants to get rid of the US dollar, you know you have a problem. (Western Journalism)
• “Japan’s Foreign Auto Production Damps Yen Effect” (Wall Street Journal)
• “Euro Stumbles as Draghi Outlines Case for Weaker Currency” (Wall Street Journal)

Commodities

• “Copper Prices Dim on Uncertain Demand” (Barron’s)
• London metal dips on firm dollar, increasing supply. (Reuters)
• “Goldman Sees Iron Ore Rout in 2015 as Output Quickens” (Bloomberg)

China’s Direction

• “China’s Banks Pose World’s Largest Systemic Risk” (Wall Street Journal)
• How to boost China’s economy: Qualitative Easing. (Wall Street Journal)
• “The Truth about China’s GDP Numbers” (Business Spectator)
  

Credit Markets

• Some regional banks trade at tighter credit spreads than TBTF banks. (Nasdaq)
• “No Need to Panic about High-Yield Bonds” (Financial Times)
• And now . . . credit default swap ETFs. (ArmstrongEconomics.com)

Derivatives

• JPMorgan and Goldman now offering swap contract tied to speculative grade bonds. (Bloomberg)
• JPMorgan creates derivatives to short junk loans. (Bloomberg)
• “Fight Brews on Changes that Affect Derivatives” (New York Times)

Energy

• “IEA: Oil Demand Growth Forecast Lowered” (Oil & Gas Journal)
• Despite conflicts in Middle East, North American production keeping oil market well supplied. (CNBC)
• The latest energy breakthrough: artificial photosynthesis. (CleanTechnica)

Euro Crisis

• German 10-year bond yield falls below 1%. (Wall Street Journal)
• “Eurozone Crisis: The Grim Economic Reality” (BBC News)
• “Euro-Zone Economy Stalls in Second Quarter as German GDP Slips” (Wall Street Journal)
• “Why the Euro Crisis Still Isn’t Over, in 1 Chart” (Washington Post)

Hedge Fund Money

• Loeb reveals stake in Ally Financial. (Business Insider)
• “Carl Icahn Places Bet on Gannett” (USA Today)
• “Why Burger King Is Paying 9% for Warren Buffett’s Blessing” (Wall Street Journal)

Interest Rates and Central Banks

• “Fed Could Toughen Policy Stance as ECB Takes Easy Money Baton” (CNBC)
• “US Interest Rates Are Too High: Fed’s Kocherlakota” (Reuters)
• “China to Free Up Interest Rates within Two Years” (China.org)

Japanese Debt and Inflation

• “Crazy Abenomics Orgy In Japan Is Ending Already — Pounding Hangover Next — Wolf Richter” (David Stockman’s Contra Corner)
• “The Wrath of Abenomics Crushes Japanese Consumers, Slams Economy” (Seeking Alpha)
• “Japan’s ‘Abenomics’ Feared in Trouble as Challenges Build” (Reuters)

Stock Market

• Shiller’s CAPE ratio is at pre-crash levels. (Yahoo! Finance)
• “Stock Market Capitalization to GDP — Through Q2 2014” (EconomicGreenfield)

Follow the Bubble

• Emerging Market Stocks are rebounding strongly. (ETF.com)
• “China Real Estate Bubble Continues to Deflate” (International Business Times)
• “Fed Incompetence and the Financial Bubble Indicator” (Forbes)

Time Capsule

It is in times of calm that it is best to prepare for times of unrest. While the markets are now at all time highs, tensions around the world are mounting. From the banking system, to taxation, to unconventional monetary policy, to unstable currencies in Europe and Japan, there is a growing feeling that the status quo cannot continue forever. If we are to encounter a new crisis, will you recognize it when it comes? What will it look like? What signs will you see? This article shows a fascinating contrast between the coverage of the 1907 financial panic by the New York Times and the Wall Street Journal. It illustrates the difference between news and information — making one wonder about the quality of today’s reporting.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.