Huh?

I’m a bit confused.

Japanese bonds?

If you had to bet your life what would you bet on? Does not feel like 2008 or 2001? Far from it. So no bear in Q3 or Q4. And when the China deals gets signed the market should go higher. Just rays of sunshine today.....


"I wonder if the Emperor Honorius watching the Visigoths coming over the seventh hill truly realized that the Roman Empire was about to fall"

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"The great pleasure in life is doing what people say you cannot do."

Edited. Wondered why you were confused then read the title.....duh.

I kind of look at it like the san Andres fault, we are way closer to the end than the beginning. Statistacllly speaking, we should be within a few years of the end, probably less.. I dont see any big retail or housing bubbles that need popping, just some normal adjusting going on, as it should. So on the micro level, I think things are solid, and interest rates are set to go lower, from an already lowish point. People have jobs, albeit not paying as great as they used to, but workers spend money, and spending is what our economy is based on

Now on the macro level, it could happen anytime, like the big quake. So much stuff going on we are not privy to, and even if you were, one guy and a few cohorts could change it overnight. There is a lot of noise about tariffs and such, they move markets pretty quickly now. But I think Trump may be onto something for the long term, so some short term pain is just the price. But on the other hand, he wants to win the next election, so not sure he will actually do the right thing, but the thing he thinks will get him elected again. This is the one area where I think he stumbled onto an area that has been a long time coming. Not sure the deficit is a factor much anymore, just seems to be this big number, getting bigger, that no one bothers with in the near term. I mean when we hit a trillion in debt, most would have said that no way we survive 20 trillion!!

So as any poker player would tell you, if you are a at best 20%er to keep this thing going, then get out and wait for a better spot. And that is exactly what I have done, just playing some hands here and there, but not getting back into the game in its entirety.

There are many here much more knowledgeable than me in finance, will be interested in their response.

I don't know the answer, but it seems crazy in this time of economic prosperity we are creating massive debt instead of paying it down.

Which is the cause and which is the effect?

"The market can remain irrational longer than you can stay solvent." - John Maynard Keynes

From the perspective of fundamental investing, it's easy to be bearish. I forget the exact number but something like ~30% of the companies in the Russell 2000 haven't been profitable in >3 years. A good chunk of the S&P 500 has had negative free cash flow (despite positive earnings) for >3 years as well. Debt-fueled stock buybacks have turned most equities into "collateralized debt obligation residuals" to paraphrase Gundlach (I think this is very accurate fwiw). You could go on and on and on with stats that look bad from a fundamental perspective.

....yet the markets continue to float higher and continue to do so on almost no volume. Why?

Well, buybacks are a big part of the answer. U.S. corporates have been the largest buyers of their own stock for a while now... maybe two or three years IIRC... but 2018 was definitely a banner year. A lot of people have said that credit quality degredation and balance sheet leverage will be an impediment to further buybacks in the future. I'm not so sure about that because it assumes that the companies will behave collectively to remain IG.

The line of reasoning goes that if all of the debt currently as BBB were to slip below IG it would overwhelm the junk markets thus sending rates prohibitively higher and, therefore, companies with BBB ratings will avoid further leverage to remain IG. The problem with that line of reasoning is that a handful of companies will probably find that they can fall below IG and still borrow to buyback their own stock (or do... whatever).

This is a decent read on the matter: https://www.bloomberg.com/...cks-it-looks-ominous

Between 2014 and 2018 the net sum of activity between foreign investors, domestic households, life insurers, mutual funds, and pension funds was ~$1.1trillion in sales vs ~$2.95trillion in corporate buybacks over the same period of time. This data misses a rather important fly in the ointment, however. While pension funds sold ~$1trillion in stock they were (primarily) the ones lending money to corporations to buyback their own stock (which the pensions were selling to them! LOL!). This is a bit of a revolving door whereby pensions drove up the value of their own holdings while increasing their AUM.

Said door can continue to revolve for a long time. The music will "stop" when one of those pensions goes to redeem its interest in a CDO or doesn't roll a loan to a non-bank lender.... basically, when they redeem any debt security that isn't functionally liquid even though the pension might think it's liquid. That's when the music will stop.

Edit to add: fun anecdote about corporate mismanagement: Chipotle is buying back its own stock even though it trades at ~100x trailing earnings and ~50x future earnings estimates (good luck with that btw) which implies <2% ROIC while the rent premium they're paying on new stores with TI allowances is >30% (in other words, the landlord bears most of the cost of building a new store for them but they're paying a rent premium that amounts to ~30% per year assuming the TI is amortized over a 10 year term).

Bingo.

Most people don't realize that money and debt are two sides of the same coin.

When a European specifically an italian bank goes down

+1.

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"The great pleasure in life is doing what people say you cannot do."

Or when the Chinese real estate market crashes and they stop buying US debt and want their money back.

For a long time I thought that would be the catalyst but Italian banks have been functionally insolvent for a while now despite Draghi doing his best to send even junk bonds into negative yield territory. I'm somewhat convinced that the EU has resigned itself to gradually wall off its financial system from the rest of the world and slowly digest all of the bad assets on its banks' books. At this point, they're going to have to pray that they don't lose preferential and asymmetrical access to the U.S. market because if they do Europe will become very poor very quickly.

I don't know where the blow up will come from tbh. I do suspect that someone out there outside the U.S. financial system is running around critically short USD (as in they have far less than they say they do).

Eh... it doesn't quite work like that. They don't want their money back. In fact, doing what you suggest would likely crash their real estate market. In order to actually repatriate USD denominated assets like treasuries, they'd have to buy renminbi in the open market (and the renminbi don't really circulate outside of China so the PBOC would be buying renminbi from its own citizens). Its citizens tend to buy and own real estate as an inflation hedge but if the renminbi is suddenly bid there's no longer a reason to invest in real estate... in fact, it's a reason to sell real estate and move into renminbi. Further, bidding up the renminbi significantly would render Chinese exports non-competitive.

They'd also be inviting capital flight in a country where the #1 priority for newly minted millionaires is to figure out a way to get their money and themselves out of the country. Why? Well, the Chinese have no qualms about executing wealthy people if they step out of line.

The idea that the Chinese could somehow "weaponize" their holdings of USTs is usually backed by faulty assumptions.

The notion that the Chinese real estate market could crash, however, is very accurate and real. No market is immune from the laws of supply and demand. I'm very curious to see how long the Chinese can keep the game up and how creative they get along the way.

An interesting anecdote, a friend of mine who just took a job with NBC Universal was sent over to China for three years on assignment. He's renting a pretty nice one-bedroom apartment in a nice part of downtown Beijing in a new building for ~$1,000 a month. He was curious to know what that type of unit would sell for so he did some research. Any guesses? $300,000? $400,000? More?

Way more. Nearly $800,000 (IIRC). Besides the horrible ROI on its face, you have to take into account property taxes (I'm assuming they exist), assessments, and reasonable escrows. When you do, there's no reason to believe that investment has a positive carry.

Why may be investors trying to sell and no one willing to buy. Ask Woodford.