The Race Continues: Economic Growth vs. An Economic Tantrum-Week 2

Chinese Bond Market

On May 31, 2017 the Wall Street Journal reported that Chinese five-year bonds traded at an interest rate higher than the Chinese 30-year bonds. In the financial world, this is called an inverted yield curve and is a forecast of a recession WHEN the increase in short-term rates is being driven by that country’s central bank. That usually means the central bank is attempting to slow down that economy.

However, in the current situation, the fact that the five-year bond interest rates are higher than the 30-year bond interest rates reflects that investors are dumping the five-year bonds in an effort to raise cash. There are several reasons for that happening in China currently, including a new bank regulator that is attempting to gain control over the Chinese shadow banking industry which has more than nine trillion dollars in questionable assets. That amount is almost equal to China’s GDP and three times their foreign reserves.

The last time a major global economy had an inversion of the yield curve because of investors selling bonds (as opposed to the central banks raising the rate) was the USA in 2007. You will recall that 2008 and 2009 were “historic years” in both the U.S. and global economy.

Prudent investors should contemplate the significant ripple effects of a regulation driven investment yield curve in China. Those ripple effects will be felt in both the USA and the global economy.

In these uncertain times, it is critical to remember that land is the source of all wealth. Every product that we humans consume originates with land. Not all tracts of land are equal in quality and portfolio management requires every investor to hold some cash for liquidity. But historically, long term the best investment is land.