Week End Blog – China’s dilemma, vanishing yields, and stock picker Yellen

This week was overshadowed by sad events in the Ukraine and the Middle-East. The phrase of ‘it’s all relative’ comes to mind. The events had their impact on financial markets. The VIX index spiked, stocks went down, as did bond yields.

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Al lot of news coming from China this week. Lending data for June show that Chinese credit growth is relentless. Total Social Financing was 40%(!) higher than expected.

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One day later China reported GDP growth of 7.5%, exactly on target and 0.1% above market expectations. The lending and GDP data are strong indications that China has opted to keep economic growth high, even if this leads to an even bigger credit bubble. In a mini blog I compared China’s precarious situation with having to sail between the mythical Scylla and Charybdis, a voyage that can’t be completed without incurring some kind of injury. China’s options? Unsustainable credit growth to sustain GDP growth or, sustainable debt at the cost of lower growth.

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Targeted expansionary measures and the reluctance to really push credit growth down have resulted in better economic data in recent weeks. The China economic surprise index, which measures the extent to which reported macro data differ from expectations, is now back in positive territory.

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The dreadful events of this week were also reflected in bond yields, which went down, again! At the time of writing the German 10-year bond yield is … 1.14%. Soon there will be no yield left. In the US the 10-year yield fell below 2.50%.

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Yellen took a prominent role this week, as well. She showed clear ambition to become an asset allocator or even a stock picker. In her, what I expected to be a pretty boring, Congressional testimony, Yellen warned explicitly against high valuations for biotech and social media stocks. Speculative debt is also overvalued, according to the Fed boss. As for other assets, Ms. Yellen is pretty happy with current valuations.

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Meanwhile market expectations for the first rate hike hardly moved from last week. Best guess? Around the June meeting next year.

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As in earlier weeks, Bitcoin has the honor to finish up the week end blog. In another sign that Bitcoin is slowly, but steadily becoming mainstream, it showed up in the Bloomberg Global Poll. Asked if the crypto currency has reached unsustainable, bubble like levels, 55% of the respondents answered ‘yes’. While only 14% of them said US stocks are in bubble territory. I am really curious on what assumptions the respondents based their assessment. The Bitcoin world is still divided, you are either a believer, stating that Bitcoin will hit USD 10 000 this year, or a non-believer, arguing Bitcoin will be gone within years. There is nothing in between.

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Until next week. I hope that the world looks a bit prettier by then…

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