Japan and the Eurozone have abnormally low bond yields because investors aren’t convinced that their governments’ ultra-easy monetary policies and debt-bloated fiscal policies will revive their economies. These policies are propping up their social welfare states, but aren’t stimulating their private sectors.
Near-zero government bond yields certainly allow the governments of Japan and the Eurozone to keep borrowing to fund their social welfare spending. Yet bank credit remains tight for other borrowers, particularly in the Eurozone. The accommodative monetary policies of the BOJ and ECB remove all the pressure on their governments to rein in their fiscal excesses. Consider the following recent developments:
(1) In Japan, Abenomics, which is simply a bigger dose of the same stimulative policies that didn’t work in the past, isn't working now. Industrial production plunged 3.3% in June (the steepest decline since March 2011), and 6.9% from the recent peak during January. It is back down to the lowest level since June 2013. The outputs of both consumer and capital goods industries are down.
(2) In the Eurozone, the Economic Sentiment Indicator recovered smartly last year, but has stalled over the past four months through July. Most of the region’s survey-based economic indicators have been upbeat for the past year. However, the actual economic recovery has been extremely weak. This is confirmed by the flat trend in the forward earnings of the EMU MSCI over the past year as analysts’ consensus earnings expectations for 2014 and 2015 continued to plunge through the week of July 17.
Today's Morning Briefing: New Abnormal? (1) New abnormal for bonds. (2) Old normal for stocks. (3) From endgame fears to anxiety fatigue, and now complacency. (4) The Bond King’s word games. (5) Old vs. new normal (or neutral). Good morning or good evening? (6) Greenspan and Yellen are investment strategists now. (7) Should the Fed have an investment opinion on biotechs? (8) Japan and Eurozone are abnormal. (9) Old normal GDP in US. (10) Fed in no rush to normalize interest rates. (More for subscribers.)
Near-zero government bond yields certainly allow the governments of Japan and the Eurozone to keep borrowing to fund their social welfare spending. Yet bank credit remains tight for other borrowers, particularly in the Eurozone. The accommodative monetary policies of the BOJ and ECB remove all the pressure on their governments to rein in their fiscal excesses. Consider the following recent developments:
(1) In Japan, Abenomics, which is simply a bigger dose of the same stimulative policies that didn’t work in the past, isn't working now. Industrial production plunged 3.3% in June (the steepest decline since March 2011), and 6.9% from the recent peak during January. It is back down to the lowest level since June 2013. The outputs of both consumer and capital goods industries are down.
(2) In the Eurozone, the Economic Sentiment Indicator recovered smartly last year, but has stalled over the past four months through July. Most of the region’s survey-based economic indicators have been upbeat for the past year. However, the actual economic recovery has been extremely weak. This is confirmed by the flat trend in the forward earnings of the EMU MSCI over the past year as analysts’ consensus earnings expectations for 2014 and 2015 continued to plunge through the week of July 17.
Today's Morning Briefing: New Abnormal? (1) New abnormal for bonds. (2) Old normal for stocks. (3) From endgame fears to anxiety fatigue, and now complacency. (4) The Bond King’s word games. (5) Old vs. new normal (or neutral). Good morning or good evening? (6) Greenspan and Yellen are investment strategists now. (7) Should the Fed have an investment opinion on biotechs? (8) Japan and Eurozone are abnormal. (9) Old normal GDP in US. (10) Fed in no rush to normalize interest rates. (More for subscribers.)
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